On April 1st 2012, my book,”Dagbok från USA”, came out in Sweden. It will also soon be published in English (as an e-book for Kindle and for other readers) with the title: “Diary from the United States – Notes on a society in crisis“. As an appetizer for English speaking readers, I will the coming weeks publish some excerpts from the book.

The question is whether a country that spends just about a fifth of its GDP on health care in the long run can afford not to have a rational health care system

We know that U.S. health care today costs in the range of 16-17% of GDP. This compares with 8-10% of GDP in most European OECD countries. Sweden’s total expenditure on health care was 9.4% in 2008. So roughly speaking, American health care today costs at least 50% more than in other OECD countries as shown in the graph below (Source: “Health Care Spending In The United States and Selected OECD Countries”, 2011).

How did this happen? Why is U.S. health care so expensive? There is no simple answer. However, one can, I think, explain most of the big difference with three factors.

A higher relative cost position for medical treatment is the first reason. Pharmaceutical costs and medical salaries are two examples. Why is this so? According to an interesting study (Vladeck & Rice, 2009), the high relative costs more than anything else can be explained by a too weak ordering function in the American health care system, and a significantly weaker ordering function than in most other OECD countries. The fragmented private insurance sector in the United States simply does not have enough “demand power” to resist cost increases among providers. The result is a huge transfer of resources to doctors, other caregivers and health care companies. The outward sign is constantly rising costs.

Second, there is, relatively speaking, more to do. Or should be. Americans in general are sicker than, say, Swedes in general. One of the reasons is that the proportion of adults who are obese (BMI> 30) is significantly larger in the U.S. than in Sweden, 30% vs. 10%. While the picture is not entirely uniform, we know that use of health care in the U.S. is lower than in most other OECD countries. The number of beds in acute care hospitals per citizen (“acute care beds per capita”) is the lowest along with the Netherlands. And as for visits to doctors per citizen, the U.S. figure is among the lowest. It’s remarkable that here we have a country which per capita invests substantially more on its health care system than other countries without their citizens consuming more health care. The wording “consuming” is conscious. It may be that services are available, and needed, but not financially feasible. The health care services are simply too expensive. This is the thesis in an acclaimed article from 2003 (Anderson et al, 2003) with the self-explanatory title: “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries.”

The third reason, and I will devote some attention to that here because it’s too little discussed, is the very high administrative costs of the U.S. health care system. By administrative costs one means that portion of total health care costs that are non-medical, that don’t have to do with actual medical treatment

There are two types of administrative costs. First, classical transaction costs, i.e. cost of a transaction in the market between buyers and sellers. For example what it costs for a hospital to send bills to patients and insurers. Second, internal administrative costs, such as the cost of a transaction within a single organization. Like when a hospital has a system for internal debiting for services one department delivers to another department.

Medical care is special in the sense that there are always three players involved – patients, health care providers and the financing institutions (which in the U.S. is both the private insurance companies and government). All three have to make transactions with each other. We know that the administration costs in the U.S. healthcare system are extremely high, over 30% of total health care costs according to a relatively recent study (Woolhandler et al, 2003). The study shows that U.S. administrative expenses are twice as high as the corresponding costs in the Canadian health care system. It’s highly probable that the difference can be explained by higher transaction costs, especially contract and control costs, in the fragmented U.S. system. Here we have one of the main explanations for America’s high health care costs. If we assume that the U.S. figure for administrative costs as a percent of total cost is 30%, we can easily calculate, all else being equal, that the American healthcare would cost 13.5% as a share of GDP in 2008 instead of actual 16% if the U.S. have had the same level of administrative cost as Canada.

Almost certainly the single most important reason why U.S. health care costs are so high, and rising so quickly, is that the American health care system is very fragmented with many players involved. It’s said that there are around 1,500 insurance companies. Since all these companies must have relationships with many hospitals, medical centers, private clinics, and other providers, a lot of administrative work is the consequence. In addition, the insurers have contacts with thousands, perhaps millions, of patients, who in turn have relationships with their caregivers. That said, there might also be other things that raise administrative costs. “Gray areas” and ambiguities in the responsibilities of various parties in such a fragmented system may be an additional explanation. The relative ease and frequency of malpractice suits may also be a factor. The risk of getting sued may simply create a costly bureaucracy with its own administrative machinery.

The interesting question is why U.S. politicians have chosen a system for health care funding that obviously has an internal systemic error, giving low bargaining power over providers and high administrative costs. We can assume that the answer has something to do with ideology and values. The political debate before the health care reform in 2010 shows that clearly. Fierce outcries against “socialized medicine” were directed at politicians who felt that the American health care system needed radical change, for example a single-payer system much as in Canada and England, to avoid the private insurance companies’ involvement and thus increase bargaining power and reduce administrative costs. There was never, in either of the two major parties, a majority for such a proposal. Shifting from a system of private financing to a tax-funded, single-payer system is, I guess, inconceivable in the United States. It does mean however that America chooses a system that apparently is less effective and thus more expensive than it needs to be. The question is whether a country that soon spends almost a fifth of its GDP on health care can afford to act irrationally in the long run, putting ideology and values ahead of efficiency. I do not think so.

Literature:

“Snapshots-Health Care Spending In The United States and Selected OECD Countries”, 2011, Snapshots: Health Care Costs, The Henry J. Kaiser Family Foundation, April 2011, (http://www.kff.org/insurance/snapshot/ OECD042111.cfm);

Anderson, G. F. et al, 2003, “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries”, Health Affairs, November/December 2003, vol. 22, no. 3;

Vladeck, BC & Rice, T., 2009, “Market Failure And The Failure Of Discourse: Facing Up To The Power Of Sellersburg”, Health Affairs, September/October 2009, vol. 28, no. 5;

Woolhandler, S. et al, 2003, “Costs of Health Care Administration in the United States and Canada”, The New England Journal of Medicine, Vol. 349, no. 8, August 21, 2003, pp. 768 ff;

First published (in Swedish): October 15, 2011