Is there a systematic tendency for typical U.S. consumers of health care to consume “too much” or excessively costly care relative to alternative uses of resources? Measuring allocative efficiency is also difficult. A first challenge is to measure actual consumption of healthcare goods and services while holding prices constant, and to determine whether extra consumption (if observed) is justified by higher demand.
provides six indirect measures of healthcare consumption. In terms of physicians per capita or hospital beds per capita, the United States ranks in the middle of the pack. The United States has 2.7 hospital beds per 10,000 people, compared to 2.3 in the United Kingdom, 6.4 in Germany, and 8.1 in Japan. The number of practicing physicians in the United States, at 2.4 per 1000 population, is just higher than the number in the United Kingdom, 2.1, but below that in France, 3.4 (OECD, 2008
). While a reliable quantity index of pharmaceutical consumption is elusive, a simplified measure— grams of active ingredients (in prescription drugs) per capita—is lower in the United States than in Canada (146, where 100 is the reference U.S. index) and in France (171), but higher in the United States than in Germany (85) and Japan (56) (Danzon and Furukawa, 2008
Of course, these numbers are not direct measures of services delivered. The intensity of care per day of U.S. hospitalization is higher than in other nations,4
and the number of physicians per capita does not adjust for the level of training and quality. Furthermore, rates of specific treatments are often higher in the United States; for coronary procedures, which are typically provided on an inpatient basis, the United States performs 587 procedures per 100,000 people, compared to 357 in Germany and 154 in the United Kingdom (Peterson and Burton, 2007
, p. 13). Nor is the United States the top nation on every measure of the amount or intensity of care; for example, shows that the number of MRI machines per million people in the United States, at 26.5, exceeds the number in Germany (7.7) or the United Kingdom (5.6) but lags behind Japan which has 40.1 MRI scanners per million people. However, unlike other nations, the United States is consistently at or near the top of all of these measures.
The fifth and sixth allocative measures are waits for elective surgery of more than six months among those receiving such surgery, and whether patients felt the physician recommended treatments with little or no benefit. These measures, as expected, are strongly negatively correlated; the United Kingdom has both long waits for elective surgery (15 percent) and little reported overuse (10 percent) while the United States has short waits (4 percent) and much more overuse (20 percent).
Levels of utilization alone don’t always inform us directly about allocative efficiency, which relates to the local slope of the production function, as shown earlier in . One way to place a lower bound on the marginal cost per life year is to consider the average change in costs relative to the average change in outcomes over time for a healthcare system. shows one hypothetical example involving a shift in both spending and outcomes over time (from A
) involving both a shift in the production function (technology) from 1988 to 2008 as well as a movement along the production function, perhaps reflecting a different curvature of the function or rising income levels leading to spending more for health. Time-series comparisons yield the slope of the line from A
, which, given a shift in the production function, will indicate a higher average return on factor inputs than the local or marginal cost-effectiveness ratio, as shown by the slope of the production function at point B
, given by the line CC’
Health Care Production Functions: Shifting over Time
Considerable evidence suggests that the shift in the production function over the past century has yielded great benefits. U.S. life expectancy rose from 47.3 years at birth in 1900 to 77.8 in 2004; Nordhaus (2003)
estimated that the growth in life expectancy has provided as much in value to Americans as the corresponding increase in consumption. Similarly, Murphy and Topel (2006)
placed a value of $95 trillion on the improved life expectancy between 1970 and 2000, which was roughly three times medical spending during this period. Health has improved over time for many reasons. Early in the twentieth century, changes in living conditions, sanitation, and behavioral factors like nutrition, exercise, and smoking cessation were far more important than medical care in explaining public health improvements (Fuchs, 1974
; Cutler, Deaton, and Lleras-Muney, 2006
). But in the last few decades, reductions in cardiovascular disease accounted for 70 percent of the gains in survival (Cutler, Rosen, and Vijan, 2006
). An examination of cardiovascular disease is thus a useful point of departure to assess the relative contribution of behavioral changes, low-tech medical technology, and high-tech medical technology to recent gains in life expectancy.
Ford et al. (2007)
accounted for factors which led to a decline of 340,000 annual cardiovascular deaths in the United States between 1980 and 2000. Health behaviors that are not directly associated with health care, such as reductions in cholesterol, and thus high blood pressure, among untreated individuals, accounted for 61 percent of the decline, albeit with 17 percent (59,000 deaths) clawed back by the rising rates of diabetes and obesity. Twenty percent of the decline in mortality was the consequence of off-patent and inexpensive drugs—aspirin, β
blockers, anti-hypertensives—whose costs are measured in pennies. An additional 13 percent of the improvement was the consequence of “medium-tech” and more expensive drugs like ACE inhibitors and thrombolytics. Finally, “hi-tech” medical interventions such as cardiac bypass surgery, angioplasty, and stents accounted for just 7 percent of the overall gains in cardiovascular mortality.
Thus, the recent historical gains in health outcomes may be more closely related to the influence of 1970s exercise guru Richard Simmons than to the diffusion of open-heart surgery. In addition, the remarkable productivity gains in cardiovascular treatments have not been replicated in other diseases. Cutler (this issue) reports the more modest improvements in cancer mortality were generated by low-cost early screening, rather than more expensive end-stage treatments where success is measured in weeks of life extended.
The Cutler, Rosen, and Vijan (2006)
study attributed one-half of the improvement in health outcomes to medical expenditures, arguing that this would be sufficient to compensate for the biases noted above. They found that, during the 1960 to 2000 period, the cost-effectiveness ratio was a highly favorable $19,900 per extra life year for newborns, considerably lower than either the commonly used $50,000 per quality-adjusted life year threshold or the approximately twice annual income threshold derived from a constant absolute risk aversion utility function (Garber and Phelps, 1997
). However, even these estimates may overstate the return to expenditures on medical care. While Cutler, Rosen, and Vijan (2006)
discount future expenditures, they do not discount future life years. The authors argue that by not discounting they avoid having to value the current life-year of a 40-year-old mother differently from the 40th
year of her child. But this failure to discount outcomes leads to the Keeler–Cretin paradox (Keeler and Cretin, 1983
): if one treats all life years as equally valuable, regardless of whose life-year is in question and when the life-year is saved, and so does not discount life-years, no money should be spent on health care in the present, because health expenditures should be delayed infinitely far into the future; the longer one waits (and accumulates interest) until spending the money, the more life-years can be saved. Thus standard practice discounts life-years and costs at the same rate.5
shows the recalculated measures of the cost effectiveness ratio (the slope of the line AB in ) for the 1960s through the 1990s for a representative individual age 45.6
When both life-years and expenditures are discounted, the average cost-effectiveness ratio for a life saved by health care (again, assuming that half of life-expectancy gains arise from health care) rises from $64,000 during the 1970s to $159,000 in the 1980s and $247,000 in the 1990s. Because these measure average returns, they are lower bounds on the local or marginal cost-effectiveness ratio that would allow us to judge whether health care is allocatively inefficient or not. Given the importance of low-cost medical treatments in explaining overall cardiovascular mortality declines, one would certainly expect that the marginal cost-effectiveness ratio exceeded one-quarter of a million dollars.
Cost per Life Year Gained for a 45-Year-Old: Undiscounted and Discounted Life-Years
But perhaps other countries have exhibited similar (or worse) degrees of allocative inefficiency. In other words, we might want to ask a different question: have the incremental dollars spent in the United States—in excess of what the United Kingdom or France has been spending—generated commensurate benefits? Comparing changes over time in the United States with changes over time in other countries avoids many of the pitfalls of traditional cross-country comparisons.
shows spending for the United States and a selection of high-income countries: Japan, Canada, the United Kingdom, France, Germany, and Switzerland. In the discussion that follows the average for this group of peer countries is unweighted, so Switzerland counts as much as Germany, but the population-weighted averages (and the data from individual countries) yield a similar pattern. In 1970, the United States spent 40 percent more on health care than the average of the peer countries, and since then the gap has widened, to 90 percent by 2004. In contrast, life expectancy, shown in , has improved at a slower rate in the United States, from 99 percent of the average life-expectancy for the European comparison group in 1970 to 97 percent in 2004. These results are not sensitive to the age at which life expectancy is estimated; for example, the results are similar for people over age 65, a group nearly universally covered by Medicare. Indeed, between 1970 and 2003, every country in the comparison group achieved larger increases in life expectancy at age 65 for both women and men, with the exception of Canada, whose 65 year-old men experienced the same 3.7 year increase in life expectancy as their American counterparts.7
Figure 4a Per Capita Health Care Spending in the U.S. and Peer Countries: 1970–2004
Similar results were found when looking just at mortality deemed “amenable” to medical care, such as bacterial infections, treatable cancers, and certain cardiovascular diseases, as shown near the bottom of (Nolte and McKee, 2008
). In this area as well, the European countries have experienced larger declines in mortality than the United States. Other countries, then, have shared the enormously valuable improvements in health that Americans have enjoyed in recent decades, and at much lower cost.
Of course, longevity gains are not the only benefits from innovation in health and medical care, and in some circumstances they are not the most important. For example, hip replacements and knee replacements enable people with degenerative joint disease to walk again and to maintain independence (Chang, Pellisier, and Hazen, 1996
), while cataract surgery (Shapiro, Shapiro, and Wilcox, 2001
) and effective treatments for depression (Berndt, Bir, Busch, Frank, and Normand, 2002
) are highly cost-effective but do not affect survival. Less is known about trends in functional status across countries.
Why then are U.S. healthcare expenditures growing more rapidly? One common explanation is that malpractice concerns drive physicians and hospitals to practice costly “defensive” medicine. Kessler and McClellan (1996)
found that states with tort reforms limiting malpractice awards experienced less growth in Medicare expenditures for beneficiaries with heart attacks. Similarly, Baicker, Fisher, and Chandra (2007)
reported that expenditures for Medicare beneficiaries in states with larger malpractice awards were 5 percent higher. Although these studies demonstrate that malpractice litigation and defensive medicine impose costs, they also suggest that these costs account for a small fraction of total expenditures and are unlikely to be the major cause of the divergence between nations in expenditure growth.
Perhaps the most compelling explanation is the diffusion and adoption of new technology, which is to a great degree endogenous within a country’s economy and healthcare system (Weisbrod, 1991
; Newhouse, 1992
; Chandra and Skinner, 2008
). Innovation and adoption are fueled by favorable reimbursement rates, particularly when there are few limits to the rapid diffusion of new treatments with unknown benefit. For example, ezetimibe, an expensive component of the controversial cholesterol-reducing drug Vytorin, had never been recommended as a first-line treatment, because of a lack of direct evidence that it was effective in reducing cardiovascular disease. Yet by 2006, ezetimibe accounted for 15 percent of U.S. cholesterol-lowering drug sales, but only 3 percent in Canada (Jackevicius, Tu, Ross, Ko, and Krumholz, 2008
Nuclear particle accelerators, 222-ton machines costing more than $100 million each (Pollack, 2007
), offer another example of what appears to be a uniquely American willingness to provide new technology with little consideration for expense. Although the accelerators arguably are highly effective in treating very rare brain, neck, or pediatric tumors, they are also used to treat far more common prostate cancers with little impact on outcomes compared to traditional radiation therapy (Pollack, 2007
). The cost structure of this treatment seems ideally suited to rapid diffusion in the United States: high fixed cost of installation, relatively low marginal cost of operation, and reimbursement rates based on average rather than marginal cost. Other healthcare systems with central budgeting or quantity constraints are far less likely to experience rapid growth in these technologies.
The United States does tend to consume more health care on a per capita basis in comparison to other developed countries, but consumption of higher inputs alone does not explain why the United States spends twice as much on a per capita basis. Anderson, Reinhardt, Hussey, and Petrosyan (2003)
emphasize higher prices as the cause of the expenditure differences. Hip replacements in the United States cost twice as much as in Canada for the identical procedure (Peterson and Burton, 2007
, Agrisano, Farrell, Kocher, Laboissiere, and Parker, 2007
). Often apparent price differences are confounded by differences in the products or services; Danzon and Furukawa (2008)
have argued for the importance of product mix, noting that American patients receive newer vintage drugs with accompanying higher prices.8
Why are U.S. prices so high? One explanation is that U.S. physicians earn more than physicians in most other countries, as can be seen in the last row in . Among the countries considered, U.S. physicians lead with average earnings of $161,000, compared with average earnings of $107,000 for physicians in Canada, $118,000 in the United Kingdom, and $92,000 in France. Specialists are also generally paid more in the United States, although the Netherlands is an exception (Peterson and Burton, 2007
). But the differences in reported salaries do not appear to explain entirely the dramatic difference in costs per procedure.
The incentives embedded in physician payment mechanisms are also important determinants of overall utilization. Japan, for example, had the highest antibiotic consumption rates in the world, in part because many physicians earned money by dispensing as well as prescribing drugs. In the United States, many physicians earn additional compensation by ordering imaging studies such as magnetic resonance imaging (MRI) and computed tomography (CT) scans, and thus it is not surprising that these diagnostic tests have experienced roughly 10 percent annual growth in recent years (Iglehart, 2006
). A McKinsey Global Institute study estimated that, despite legal restrictions on self-referral, U.S. health-care providers earned as much as $25 billion from profits on self-owned facilities providing laboratory, imaging, and other services (Angrisano, Farrell, Kocher, Laboissiere, and Parker, 2007
, p. 51). But incentives cannot explain the variation we observe across countries in every clinical condition (Dor, Pauly, Eichleay, and Held, 2007
Note that higher prices per unit of services, or higher factor earnings, have no impact on efficiency beyond their influence in determining production or consumption. (We also ignore here how prices affect incentives for research and product innovation.) Nor is there evidence that more rapid growth in prices can explain any differences in the growth rates of healthcare spending between the U.S. and other countries.