The United States is often criticized for its large expenditures on health care, but the source of this greater spending has not been fully identified. There are three conflicting explanations in the literature. The first is administrative inefficiency: the United States spends more because of its fragmented insurance and delivery system (Woolhandler, Campbell, and Himmelstein 2003
). The second explanation is that people earn more for providing the same services in the United States, as emphasized in the memorable title of one article, “It’s the Prices, Stupid” (Anderson et al. 2003
). Finally, some studies stress the additional care received in the United States (Mark et al. 1994
). Clearly, only one of these explanations can constitute the largest source of spending. Our analysis considered the relative magnitude of each. We found that the difference in spending in U.S. and Canadian hospitals and physicians’ offices was most greatly attributable to administrative costs (39%), followed by staff prices (31%), and greater volume and intensity of care received (14%). Together, these explanations accounted for 84% of the $1,589 cost differential. While it was beyond the scope of this study to determine whether the additional spending in the United States was warranted, we took the first step in answering this question by determining the major contributors to higher spending and disentangling them from one another. Future research can look to each source to further differentiate wasteful from useful spending.
Our analysis yielded similar results to previous literature. For example, a study by Woolhandler, Campbell, and Himmelstein (2003)
found that Canada spent 67% less on hospital and practitioner administration in 1999, while this paper found that Canada spent 66% less in 2002 [($412+$53.25+$776)/($696+$70.25+$1,124)]. These similar results hold even though the methods used to achieve them were slightly different. For example, Woolhandler, Campbell, and Himmelstein included in their calculations the opportunity cost of non-physician clinical staff time spent on administration, while we only accounted for physician time; they also excluded some categories of non-staff expenditures that we used in this paper.
The main limitation of this study is its inability to perfectly differentiate prices, administrative costs, and medical interventions. For example, if generalist physicians in the United States earn more because they perform more procedures for which they are reimbursed, and not because their fees are higher, then we may have overestimated the impact of prices on spending. Another unknown is how much non-staff spending is associated with administration, and how much reflects greater intensity of care. We assumed that such spending in physicians’ offices was entirely the result of greater administrative expense. Given the increasing number of procedures performed on an outpatient basis, however, this assumption may be an overstatement. We cannot quantify either of these possibilities because we do not have data on the volume and intensity of procedures performed in physicians’ offices.
On the other hand, our inability to perfectly differentiate sources of spending may have understated some costs. For example, because we multiplied the percentage difference in generalist prices by total spending on physicians, we may also have understated price differences in specialists that were not attributable to care intensity alone. The same argument applies to our treatment of non-staff costs, where the percentage difference in physicians’ offices was multiplied by administrative spending, which may have understated non-staff costs in hospitals that were not due to care intensity. These understated costs may help account for the 16% of spending that we do not explain. The missing costs also may come from expenses such as contract labor in hospitals, which we could not capture in our analysis.
We look only at hospitals and physicians’ offices and ignore other areas where prices, administrative costs, or clinical intensity may have a substantial impact, such as prescription drugs (prices) and the health insurance industry (administrative costs). In the paper by Woolhandler, Campbell, and Himmelstein (2003)
, the authors conducted a separate analysis of health insurance overhead and found that Canada spent 82% less on this area of administration.
Using purchasing power parity as a price adjuster could be problematic. In the United States, a bundle of consumer goods includes much more medical care, whereas medical care in Canada is financed by taxes. In this case, U.S. prices could be inflated. This problem was partially offset by our equal treatment of fringe benefits across countries.
An additional concern is that the intensity of medical care is not accounted for in the same way in the United States as in Canada. Since Canada does not use DRG weights to pay hospitals, we had to assume that the DRG weight for each diagnosis/procedure pair was the same in the United States as in Canada. However, because Canadians have been found to have lower levels of disability (Pozen and Cutler 2009
), their DRG weights may be overstated, so the U.S.-Canada difference may be understated.
That cost savings can be realized does not necessarily mean that these savings are desirable. Paying more for the same service seems wasteful. However, in both the United States and Canada, physicians are rivaled in pay only by senior managers and chief executive officers (Statistics Canada 2001b
; BLS 2000
). If the supply of physicians depends on the comparability of their incomes to the incomes of other highly trained people, physician incomes in the United States may not be so excessive compared to Canada.
Further, defining administration is crucial to separating wasteful spending from non-wasteful spending. Canadian spending on administration may be lower because it has more streamlined payments to providers through its single-payer system, or it may be because rent is lower and equipment is cheaper than in the United States. While complex payments may be considered wasteful, higher office overhead may not. A close analysis of non-staff expenditures must be performed to answer this question. Data from the United States showed that malpractice insurance, office space, and utilities were the largest components of administrative spending. Equipment rental and maintenance were somewhat less important, and automobiles, continuing medical education, and laboratory expenses were relatively low (Weiss 2003
). However, non-staff expenditures in Canada were not broken out the same way that they were in the United States, so these expenditures could not be compared.
We found that DRG weight per capita was higher in the United States predominantly because of more intensive interventions. A central question is whether this greater intensity is justified clinically. This question has not yet been resolved. For example, studies in cardiac care have shown that although the United States treats patients more aggressively than Canada, outcomes are sometimes better in the United States (Kaul et al. 2004
) and other times better in Canada (O’Hara et al. 2005
In sum, we found that administrative costs accounted for the greatest proportion of spending differences between the United States and Canada, followed by prices and medical care provision. Further research must be done to determine whether the additional U.S. expenditures are wasteful.