Arnold Kling  

Health Care Waste

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How much of our health care spending is wasted? In this essay, I argue that the waste is less than many people believe.

I do not believe that health-care reformers should be taken seriously when they suggest that spending on health care in the United States could be brought down to the levels in other countries simply by eliminating waste. Instead, it is far more likely that bringing down health care spending would require a significant reduction in the quality of health care that Americans receive.

In the essay, I examine data on the "usual suspects" of health care waste--spending in the last year of life, administrative overhead, etc.--and find that they are not large enough to explain the discrepancy between the U.S. health care budget and that of other countries. I then proceed to question whether longevity statistics prove that U.S. health care is no better than in other countries.

For Discussion. Read the essay. Then comment.

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The author at Duane Gran's log of thoughts in a related article titled Health care waste reconsidered writes:
    EconLog: Health Care Waste I do not believe that health-care reformers should be taken seriously when they suggest that spending on health care in the United States could be brought down to the levels in other countries simply by eliminating waste. ... [Tracked on March 23, 2005 8:56 PM]
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Duane Gran writes:

I've read convincing arguments about the inefficiency of the uninsured foregoing basic preventative medical procedures. In other words, many health issues are more affordable to prevent than to repair or contain. I would suggest including this factor in the analysis, as the lack of access to preventative care measures among the poor and uninsured may represent a significant inefficiency in private health care.

Duncan Brown writes:

Nice job, Arnold. I'm sure that quality of health care is slippery to measure. Surely the amazing drugs the US system pumps out so freely have made life possible for many people. So have joint replacements, organ transplants, heart bypasses etc.

Also, I think you're on the right track in naming doctors' pay. Many that I know feel that they have put themselves into wage slavery to pay off their huge monthly nuts (education loans and investents in practice facilities and diagnostic machinery). My doctor, to escape the cycle of 15 minute patient appointments, started one of those "boutique" practices, inviting his regulars to pay $1500/yr as a membership fee--on top of any fees for service.

The waste that I find most obvious is the amount of effort that health insurance companies and health care provides spend on trying to shift costs back and forth. My experence as a small--micro--business suggests that there's huge duplication there. (The use of postage and printing alone)!

If you can quantify that waste I'll be thankful. The nation should be grateful too!

One hopeful note is the rise of high-quality, ultra-low-cost, Western-style health care, in developing countries around the world. In Bangkok, Thailand--one I'm familiar with--you can get heart bypass for less than $10,000 all in. Then you can go recuperate at the beach. (Add round-trip airfare, and you're still well under the costs of doing the job here.) Brazil, India, and Cuba are also developing low-cost healthcare as export industries.

Thanks again.


Franco writes:

As always, I found the article interesting and insightful. 2 nitpicks:

1. When estimating that 7% of total healthcare costs are spent in the last year of life, you seem to be implicitly assuming that those who die under 65 spend nothing in the last year of their life (7 = 1/3 * 22 + 2/3 * 0). I don't know the actual number, but I'm sure it's larger than rounding error.

2. I found some of the unit changing strange. You downplay administrative expenses as wasting (at most) 2% of GDP, and immediately after cite doctor's salaries as a "real culprit" with the possibility of reducing spending by 1/8. Of course, 1/8 of 15% is (just) less than 2%. If the discussion had been in constant units, this would inevitably seem very strange.

spencer writes:

Yes -- it is a good article.

I also have a question about the last year of life data you use. You say medicare spends 27% on last year of life but total spending is only 22%. Does this imply that private medicine -- insurance -- is shifting much of the last year of life to Medicare? It looks like it to me.

I also agree that using only the two measures of infant mortaility and life expectency is a poor approach to comparing health care. Especially since historically the biggest gains in life expectency probably stemmed from public health care measures like clean water and better vacines rather than big advances in treating already ill people.

The one issue you did not raise is the free rider issue. I suppect that it would make a good study for someone to look at how much the other advance countries are free riding on our larger spending
on medicial research especially for drugs. I have no data to back up this idea, but I bet if someone looked into it it would make a great study.

On the other hand I have a problem with your comments on administrative costs. If the entire health care system employees more administrators then doctors or nurses-- a quote I have seen numerous times -- I find it hard to believe that the system is as efficient as you suggest. I'm in the school of thought with Ducan Brown on this.

Dave Schuler writes:

Am I wrong or have you neglected several of the betes noires of those who propose “waste, fraud, and abuse” as the source of high U. S. costs? First, over-consumption by Medicare and Medicaid clients (which is counter-intuitive to me)? Second, defensive medicine?

I have to admit I find your conclusion Panglossian. Should you, for example, compare outcomes between the United States and Switzerland (the next highest per capita spender)?

spencer writes:

Just reread your article and came up with another question.

You say US doctors are paid twice as much as other doctors. But is that the relevent comparison. I would think you would want to compare doctors pay to the pay of college graduates or some similiar measure in the same country. . Is the ratio of US doctors pay to other professionals also twice as much as it is in other countries. Doctors pay should be high, but is the ratio higher in the US then in other countries. I just heard a NPR discussion of how African Doctors move to the UK and British doctors move to the US. This would suggest we need to increase the number of medical schools so as to increase the supply of doctors and consequently lower doctors pay. Doctors, like economists use the education process to limit the supply.

mcwop writes:
Arnold writes: I wish that economists had been involved in doing the study. My concern is that the measures of administrative cost may be misleading. For example, the authors make much of the fact that the U.S. health care system hired administrative workers at a higher rate than the Canadian system.

The big question is how much of adminstrative costs are the result of medicare versus non-medicare. My wife is a nurse and observes that medicare paperwork takes three times longer than non-medicare paperwork.

Arnold Writes: Longevity calculations are not a sensitive measure of improvement in medical care.

Good point. Let’s say Canadian longevity is 74, and U.S. longevity is 72. Why should I conclude the difference is because of our respective health systems? For all I know, the cold Canadian weather is responsible.

Ted Craig writes:

While I would not argue for reducing the pay of doctors, I would argue for reducing the number of doctors receiving that pay. By that I mean creating a class of lower-paid professionals to handle preventive treatment. The NIH wastes a fortune developing these treatments, only to have doctors fail to utilize because there's not enough ROI. So we would still keep our cream-of-the-crop MDs, but we would pay less overall.

p writes:

Great article!

Very insighful to shiftthe debate away from the same old suspects which do not allow any real change to occur.

Waste is a great emotional trigger, but a poor policy lever.

I agree that looking ahead 15 years also forces one to see the trajectory we are on as well as evaluate alternative trajectories.

awptimus writes:

I'd blog this on my site tonight, but imma tired. However:
Aren't we seriously underestimating the power of the third-party payer? How much is the qauntity demanded increased by hidden prices (those paid by health insurance companies, not by the patient)? We've all heard people, or at least stories of people who, complain about $20 co-pays. Do we really assume that all health care is price inelastic? Or do the third party payers turn the demand price inelastic? Certainly, certain types must be (catastrophic), but many not.

Also, what about the single payer systems in countries, such as Canada, for drugs? When Canada buys a new drug, it offers a price just above cost of production. The company can either give up that market entirely and let some Canadian company steal the patent (how strict is the enforcement anyway?) or it can accept the just above cost of production price. Then the US is forced to foot their share of the R&D costs. With the third parties footing the bill, the quantity demanded for these newer drugs is much higher for their price than it would be if the patient paid out of pocket. If the demand for the drug becomes price inelastic because of the third party payer, the drug company would do better to slow production and charge the higher price. If it were price elastic, the company would have to produce more to make the same amount of money.

But I'm tired, so what do I know.

dsquared writes:

I agree with the commenter above; the implicit assumption that people under 65 don't spend anything in the last year of life has to be wrong.

I also disagree that the profits of pharma companies form an upper bound on the effect of price controls on pharmaceuticals. Surely there would also be an effect on marketing and R&D spending.

Finally, the assumption under the heading "Overhead and efficiency" appears to be that the difference between the employment of administrative workers in the US system versus Canada is accounted for by admin workers in health *care*, whereas the cited article suggests that the difference is also a result of higher headcount of administrative workers in health *insurance*. Surgeons can't pass off their paperwork to insurance clerks.

John Brothers writes:

You got me thinking about metrics.

I would think it would be relatively straightforward to measure the ratio of people who die before the "Average Life Expectancy" to the people who die on or after that age in a given year.

Wouldn't, in aggregate, your wife and other cancer survivors push down the former number relative to the latter? That would be a metric that could be revisited each year, and given some "forward looking" indicators as to where our life expectancy is going?

Similarly, the ratio of people who die violent deaths vs. non-violent deaths each year should also be a useful trend to analyze.

As for a metric for quality of life, I struggle with that - for example, Europhiles would 'poo poo' the fact that more europeans are stuck in wheelchairs because artificial limbs are not provided very often. (Vs. the US). But I, personally, would find it very important to my quality of life to be closer to 100% mobile. At the end of the day, it seems like quality is a political definition, not a logical one.

William Woodruff writes:


I am at a complete loss to explain how anyone (including yourself) can continue to defend our current health care system, in the face of overwhelming evidence to the contrary.

Even the WHO lists the United States health delivery system behind countries which our elected leaders deride.


Bernard Yomtov writes:

It's certainly worthwhile to ask how administrative costs are determined in the comparison between US and Canadian systems.

But asking is really all you did in the article. Your claim that what you did was "examine the data" on administrative costs in order to conclude that they are not enough to explain the discrepancy in spending is a serious overstatement.

David Thomson writes:

"It's certainly worthwhile to ask how administrative costs are determined in the comparison between US and Canadian systems."

Why should we care? I'm only interested in an apple to apple comparison. Canada's healthcare system is vastly inferior to our own. Which other country's medicare is comparable to our own? Canada's does not pass the laugh test.

Bernard Yomtov writes:

Canada's healthcare system is vastly inferior to our own. Which other country's medicare is comparable to our own? Canada's does not pass the laugh test.

I hear they're falling like flies up there.

Robert Schwartz writes:

Very interesting article, Arnold, but! Showing that there are no gapping wounds in a system that everyone is very unhappy with, just leads me to believe that it is suffering from a thousand small cuts.

I agree with you on several points.

First, the last year of life meme is a red herring. Of course, more money is spent on very sick people.

Second, the pharmaceutical companies are more likely the solution to the problem than its cause.

Third: administrative costs are not the biggest source of the problem. They are the part most easily controlled. A lot of progress will be made, because it is in the interests of everybody to minimize administrative costs.

Fourth: I have little doubt that most all Americans are better off and our system is not less efficent that those in other countries. OTOH, most of them are very heavily socialized and undoubtedly shot through with inefficency.

However, I do not agree with you about malpractice. Whatever its direct cost is, its indirect cost is even worse. Are doctors incomes high? One reason is that malpractice makes their careers riskier than they are elsewhere and in earlier times. Do we use too many tests?

I went to an orthopedist to have him look at my shoulder. After a brief physical exam, he told me I had a torn rotator cuff -- take naprosyn and get physical therapy. He then asked me to get an MRI. Why? To rule out bone cancer. Do I have a risk of bone cancer? No, but you can't be too sure.

Physician incomes will respond to market forces. Clearly we need to start training more doctors. Supply goes up, incomes come down. No adverse impact on health care.

High tech tests and procedurees. See above. also consider that if out of pockets and deductibles were bigger, patients might resist getting some of them. Would quality suffer. Maybe, but waste would decline also.

Clearing away regulatory bottlenecks in the supply of tests and proceedures. FDA. State CON rules. Would make them more available and less costly.

Every area that you reviewed makes the others more costly and illustrates how much we need to introduce market based reforms into the system.

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