Arnold Kling  

The U.S. as a Health Care Spending Outlier

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The McKinsey Global Institute reports,


In a study comparing the United States and the United Kingdom, Aaron showed that the United States has four times the number of CT scanners per person, and performs four times the number of scans per person...It has been argued, including by British radiologists, that the United States scans more people than is medically, or economically warranted...It is a similar picture with MRI scanners. Catton et al and others have argued that the development and proliferation of expensive medical technologies such as CT scanners and MRIs (as well as expensive pharmaceuticals) has been a significant factor driving up the cost of US health care.

One finding that surprised me is that the proportion of specialists among U.S. physicians--64 percent--is not higher than that in the OECD average. Average compensation for specialists is 6.6 times GDP per capita in the U.S., compared with 4 times GDP per capita in the OECD average. For generalists, the ratios are 4.2 and 3.2, respectively.

Compensation, particularly in the U.S., is price times the volume of procedures. Some of the higher compensation for U.S. physicians reflects a higher work load in terms of procedures (whether these procedures are all necessary is, of course, doubtful).

McKinsey finds that 64 percent of administrative costs in private health insurance consist of product design, underwriting, and marketing. Paul Krugman writes about this as though all of the money is spent to screen out sick patients. I do not think it is fair to characterize it this way, but it is still somewhat disturbing to see that much overhead incurred before the insurance company even gets around to settling claims.


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COMMENTS (8 to date)
Ben writes:

Since we can't get to the report, what percentage of dollars go to fulfilling claims vs. admin costs? How does this compare to other insurance sectors?

As for the different admin costs, which costs do you find disturbing and why?

The UK has too few CT scanners and too few everything else such as MRI scanners.

What is worse is that the few MRI scanners are grossly under-used - just like the operating theatres - mostly idle (although vastly expensive to run) for about 16 h a day - because there is no incentive to use them in a socialized system.

Re: CT scanners. When I was a medical student in 1980, there were more CT scanners in Boston, Mass. than in the whole UK.

So maybe the US does too many CT (and other) scans - but the UK certainly does too few.

matt writes:

Interestingly I just applied for health insurance online with Aetna as I am taking a new consulting gig in Texas. Texas gives few mandates about what insurance has to cover, so much of product design is deciding what not to cover. This is point Kruegman.

The high deductible plan I opted for is very reasonalby priced. However it doesn't cover many common conditions. Fortunately none I have, barring a blood transfusion none I am likely to get, they don;t cover Aids for example.

A few interesting things about this. One as a healthy non-smoker young male, I am choosing the least amount of coverage I need, basically a plan that only pays after 5k of medical expenses. It is costing me very little.

In ten years I will be in my 40s and I will also need health insurance. However I wonder how easy it will be to get if I other people like me choose the type of plan I am choosing.

I see health care as a problem of timing. Now that I am young I want to spend more because I can work more and I am not sick. When I am old I really don't want insurance I want insolation from costs which likely will exceed my ability to pay or I completely run out of my retirement money.

However as much money as I save its doubtful I can fully insolate myself from something truely castastrophic. Additionally the way insurance works now going it alone is impossible because you don't have the market power to set prices, the group providers do, so doctors and hospitals charge you an arm and a leg, but your insurance co pays very little for the same procedure.

My point is there is a timeline effect going on, the same way that savings works, you start in debt then slowely save up to a peak and then spend your savings until death. Spending on health & insurance should follow the same curve, and to some degree it does. We need to get employers out the insurance business, we also need some sort of commitment from both paitient to insurnace company and vice versa that last for a long time, so rates can be set in a way that follows the curve. I think government is the only provider who can do this.

Barring this we could have private insurance whose prices must be the same for all people and whose coverage levels are set to minimums by regulators, force all to buy insurance and subsidize the elderly so they pay less in the declining portion of the curve.

Cyrus writes:

The distinction matt makes is similar to the distinction between term and whole life insurance. I know I am going to die sooner or later. A healthy young person can get term life at very reasonable rates, because they are unlikely to die within the term of the insurance. But whole life is significantly more expensive, even for a healthy young person, because the insurance company will have to make a payment eventually. And most people are better off establishing a savings account for their eventual final expenses, and at the same time getting a term life insurance policy for the contingency that those expenses come sooner than expected.

Now in the world of health insurnace, is anyone willing to write the equivalent of a whole life insurance policy? One that will cover the insured for their entire lifetime, on a predetermined schedule of premiums? In life insurance, the payout is known at the beginning, the actuarial tables are sound, and what uncertainty exists in them is likely to be in the direction of people living longer. But in health insurance, payouts decades in the future are unknown and unknowable. As long as medical technology continues to advance, it is impossible even to predict the kinds of treatments available in 30 years, much less their costs.

What people are demanding if they want long-term health insurance is not protection from quantifiable risks, but protection from unquantifiable risks. And insurance companies are not in that business.

caveat bettor writes:

There are some doctors who don't know enough about imaging to order it for patients. Take neurologists, for example, who treat pain more as a problem (e.g. prescribing nerve inhibitors) rather than a symptom (of, for example, cartilage and bone issues).

A friend of mine just endured double hip replacement surgery last month, which would not have been necessary 4 years ago had his neurologist ordered up a battery scans, which would have revealed cartilage erosion, bone fusion, and over a hundred bone fragments.

David W. writes:

I can relate to bettor's story. I recently have had my third arthroscopic knee surgery, and the preliminary image read by a "doctor" or "specialist" was negative. This made me upset, because having past experience with orthopedic nightmares, I knew that there was something wrong. So, in going home to see the doctor that had done the two previous surgeries, I found out that there indeed was a lot wrong. Among the things I had discovered that day was that I had degenerative arthritis, and being 18 years old, and a college athlete, it hurt me that I had not found out sooner. Yet, there are several things that are being done to preserve my career as an athlete. Yet, pertaining to the imaging, there are many doctors that really dont know how to prescribe screenings, and others dont know what they are looking at, or they make mistakes. Yet, one would think that in an economy like Americas, and the ratio of scanners to people as compared to other countries, wouldnt one think that we would recommend it more often than not if there was a thought of something wrong? Economically, it would be ethical to use it more than normal considering the ratio and other factors in my opinion. Also, if they had the technology we have today years ago, my mother could problably have prevented her total hip replacement surgery and possible replacement of the other one as well at this point.

Candra writes:

In my opinion, so what if we have more CT scanners and MRI machines than the UK. Wouldn't that mean we have better healthcare, diagnostc procedures, and be more advanced? I wouldn't be complaining about being treated while I'm sick and being diagnosed with the correct illness. It is stated that expensive medical technologies have been a primary force in driving up the cost of healthcare. I don't know about you, but I believe I am willing to pay the extra dollars so I can be treated for whatever ails me, and not die from a life threatening problem because people complained about having to pay too much!

Matt G writes:

I can agree with David W in the sense that our large numbers of CT
Scanners and MRI Machines allows us a variety of doctors to receive
opinions from. This in turn affords us the opportunity to receive a
second opinion in case we feel the first doctor has diagnosed our pain
or issue incorrectly. Years ago two different doctors told my brother
his wrist was not broken until the third doctor saw something. He
barely saved the Scaffoid bone in his wrist as it had been broken so long it was dying from lack of blood flow. Before I had knee surgery for
a torn Meniscus in my knee the abundance of scanners and doctors in my
area afforded me the opportunity to receive a variety of opinions with
which I could make my decision for surgery. My family is from the UK
and I visit family members there often, the lack of scanners is most
likely due to the fact that the free national healthcare system there
is so poor! My brother and I have both been sick in England and the
healthcare was so unbelievably poor that there was almost no reason to
bother. They just send you straight to the emergency room, you wait for
hours and then proceed to throw antibiotics at you hastily. I
appreciate our nation's abundance of scanners, it allows us the
opportunity to make choices with a variety of different
doctorate-backed input.

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