HEALTH CARE SPENDING

Health Care Spending

Health Care Spending

Introduction

The latest data from the Organization for Economic Cooperation and Development (OECD) show that the United States spends much more on health care than any other country. In 2002 the United States spent $5,267 per capita—$1,821 more than Switzerland, which had the second-highest per capita spending, and $3,074 more than the median OECD country.1 The magnitude of this spending differential leads to the logical question: Why is U.S. health spending so much greater than that of other countries? (Anderson, 2004)

Health Care Spending

In previous papers we have argued that the primary reason is that "it's the prices, stupid." We have shown that the United States pays much higher prices than other countries for pharmaceuticals, hospital stays, and physician visits.2 This price differential continued in 2002. For example, the average cost of a hospital day in the United States in 2002 was $2,434, compared with $870 in Canada and even less in other OECD countries. The United States also pays much higher prices for physician services and pharmaceuticals.

Part of the difference can be explained by higher U.S. incomes and cost of living. However, even after adjusting for each country's per capita gross domestic product (GDP), U.S. health spending is still $2,037 higher than the predicted value.5 In past papers we have also examined other possible causes, including population aging and administrative complexity. Neither of these factors explains a sizable portion of the higher levels of U.S. health spending. (Anderson, 2004)

In this paper we examine two commonly proposed explanations. One is that other countries have constrained the supply of health care resources, particularly for elective services, which has led to waiting lists and lower spending. A second is the threat of malpractice litigation and the resulting defensive medicine in the United States. A common assumption is that malpractice litigation is much more common in the United States, adding to malpractice premiums and, more importantly, the practice of defensive medicine. (Anderson, 2004)

We begin by presenting the latest OECD health spending data. We then examine the roles of supply constraints and of malpractice litigation and defensive medicine in explaining the variation in health spending. We conclude that supply constraints and waiting lists do not appear to translate into significant savings in other countries and that malpractice and defensive medicine are responsible for only a small portion of the U.S. spending differential. (Anderson, 2003)

The supply of nurses was lower in the United States than the OECD median, and it grew at half the rate of the OECD median of 1.3 percent per year between 1992 and 2002. One area where the United States exceeded the OECD median was the nurse staffing level in acute care hospitals. In 2002 there were 1.4 nurses per U.S. hospital bed, compared with the OECD median of 1.0 nurses per bed.

High-technology medical equipment is frequently cited as the main driver of escalating health spending.10 Although the United States tends to be an early adopter of medical technologies, it does not acquire medical technology at high ...