Outside editorial: Here's why US health care is so expensive

Posted: Wednesday, July 01, 2009

By any standard, American health care is the world's most expensive.

• We spend twice as much per person as the average of other large developed nations - $6,714 in 2006, compared to $3,414. In 2008, per-person spending is estimated to have reached about $8,300 - enough to buy a nice used Ford Taurus for every man, woman and child.

• Health spending consumes 40 percent more of our gross domestic product than the average of other industrialized countries. We devoted 16.2 percent of GDP - the total annual output of goods and services - to health care in 2007. The average in other nations is 9.26 percent.

• U.S. health spending has grown significantly faster than it has in other industrialized countries. And not just recently, either - the trend goes back to at least 1970. It's grown at twice the rate of inflation in recent years, down from nearly three times the inflation rate in the late 1990s and early 2000s.

This spending binge has important consequences. It is the reason why many Americans are uninsured, and it is why such a large portion of bankruptcy cases involve medical expenses.

It also is a big reason why wages have stagnated in recent years, pinching many American families. When health costs are stable, wages rise more quickly. When health care costs rise, wages stagnate.

High medical costs make American companies less competitive internationally. Businesses in Canada or Japan pay higher taxes, but they don't face insurance premiums that have doubled in the past 10 years.

Money spent on health care isn't available for other social needs, such as education or rebuilding the nation's crumbling infrastructure.

So it is worth asking a deceptively simple question: Why is U.S. health care so expensive?

The answers may surprise you.

It is not because of the aging population. Older people use more health care, but health spending is rising in all age groups. Besides, the population in some European countries is even older than ours.

It also is not because Americans are insulated by insurance from the true cost of care - a favorite explanation of some people on the right. We pay substantially more out-of-pocket costs than residents of other developed countries, yet their national spending is lower. Americans don't seek care more often than people in France or England.

So what accounts for the difference?

The first reason is that we're rich. Richer countries can afford to spend more on health care, and they do.

But that is only part of the answer. Princeton University's Uwe Reinhardt, one of the nation's leading health care economists, calculated what U.S. health spending would be if the size of the economy were the only factor. Then he compared it to what we actually spent in 2008. The difference? A whopping $650 billion.

That's almost six times what it would cost to reform health care and insure every American.

Some of the extra costs are caused by the legal system, which can encourage doctors to practice defensive medicine. But other factors play a bigger role.

Higher prices are one. The same goods and services - drugs, for example - cost much more here than they do in other countries. Why? Because they can. Neither the government nor the free market controls them.

Another big reason is paperwork. We spent about $156 billion on insurance company overhead in 2007. A study in The New England Journal of Medicine estimates that Americans spent $1,059 per person on administrative costs, almost three and a half times more than Canadians.

One final reason is so important that we'll examine it separately in a future editorial: Americans are more likely to receive intensive treatment - often involving expensive, high-tech equipment and procedures - than people in other countries. Supply drives demand.

You won't find that in Europe. But in Austria and Germany, average life expectancy is two years longer than it is in the United States. It's three years longer in France, and four years longer in Switzerland.

That raises another deceptively simple question: What are we getting for all that money we spend on health care?

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