Here’s why U.S. health care is so expensive.
Post-Dispatch file photo.
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 in 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’s why so many Americans are uninsured, and why such a large portion of bankruptcy cases involve medical expenses.
It’s also a big reason why wages have stagnated in recent years, pinching so 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 doubled in the past 10 years.
Money spent on health care isn’t available for other social needs like education or rebuilding the nation’s crumbling infrastructure.
So it’s worth asking a deceptively simple question: Why is U.S. health care so expensive?
The answers may surprise you.
It’s 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’s also not because Americans are insulated by insurance from the true cost of care — a favorite explanation of some on the right. We pay substantially more out-of-pocket than residents of other developed countries, yet their national spending is lower. Americans don’t seek care more often than people in, say, France or England.
So what accounts for the difference?
The first reason is that we’re so rich. Richer countries can afford to spend more on health care, and they do.
But that’s 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. Reason: 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 3½ 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, say, Europe. But in Austria and Germany, average life expectancy is two years longer than it is in the U.S. 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?
Finally, we agree on something. We spend our dollars on R and D on drugs and devices. Then we sell them abroad for peanuts. I’ve done business in other countries and the same device I paid $575k for here I could buy in Europe for half, sometimes less. Not some poor African country, England, France and Switzerland. The absence of tort lawyers is part of it, but these countries just expect it and American Drug and Device companies view the rest of the world as gravy. These countires also allow drugs and devices to be sold before the FDA approves something which sets a price. A good reform would be to pass a law that says Medicare is entitled to the lowest price used by any drug or device company any where in the world, except for medical aid to poor countries. We would balance the entire thing the next day. We have to start thinking of ourselves for once. We cannot continue to support the world as we are doing with this and the Democrats propose doing with Cap and Tax. These are not poor countires…we are just suckers.
jjk, you are part right. We are suckers, but not exactly for the reason you say.
We are suckers because we allow all of the other nations to free ride off our consumers. All of these other “Utopian” lands that pay half what we do here for devices and drugs do so because their government legislatively sets the price for those devices and drugs.
Many on the left in the U.S. learn the wrong lesson from this. They say we should regulate prices too. What would that get us? Less for more. If you decrease profits, you decrease supply. When you decrease supply (with demand likely increasing due to the lower price) you end up with shortages. People can’t buy what they want.
The lesson that should be learned is to pressure those other countries to end their practice of price controls (which by the way is another one of the secrets to how they spend less than we do…we are paying for some of their care). Their prices would necessarily rise to account for the subsidy that we have been paying for them, and conversely our prices would fall as manufacturers would no longer have to rely on the U.S. consumer to fund their R&D operations. [And yes, there is no way prices would stay high as public pressure would force the companies to "do the right thing".]
The obvious answer, controls – more controls, b/c 300,000 pages of laws on the books just isn’t quite enough. If 1,000+ unread pages for the stimulus and another for cap & trade seem about right for these concrete-bound bucket heads in Congress, I can only guess that 10,000 unread pages will be piled on top of what’s already controlling the industry. (soon, we’ll be to a point where they can arrest you and figure out which pile of laws you broke latter) The concept of simply going to your doctor, paying him in cash for most situations, and buying some sort of major medical plan for the unexpected stuff eludes a population that’s come to expect hand outs.
I’m reminded yet again of a statement of the problem I saw some years ago, and it’s still true, and very simple way to put it.
We want three things from the system. Unfortunately, we can only actually have two of them. We want:
1. Immediate access for all.
2. Low cost.
3. The “latest and greatest” treatments, technologies, and practices.
If you want low cost and the ‘latest and greatest’, then that latest and greatest will be strictly rationed. If you want immediate access for all and the latest and greatest, the cost will be unmeasurable. If you want immediate access for all and low cost, forget about the latest and greatest except in certain places with long waiting lists.
Pick 2 of 3.
Part of it, I think, also has to do with our response to pop culture. Because of shows like “House” and “Grey’s Anatomy” and others, we EXPECT our child with a bump on the head to get a CAT scan. And so on. We EXPECT our immediate care providers to throw everything there is at our case of the sniffles, just because it MIGHT be one of those rare things we saw on tv yesterday.
On the other hand, there are places in the US that DO manage to function at an average lower cost per patient with better than average outcomes. Let’s identify them, understand what they are doing that is so much better, and transfer that model to the rest of the country. THAT would truly be “the free market” at work, wouldn’t it?
Anyone who thinks these other countries do not order drug and device companies to charge less has never been there. I once was contacted by a manufacturer of a device and asked if we wanted to open up in China. The cost for the equipment was less than a fourth of what we were paying and they introduced us to our new partners, the Red Chinese Army. The theme was, “you make it up on volume”. I passed. The company that took the deal went bankrupt. We are suckers to pay more than the rest of the world. Once we pay the going “rest of the world” rate, companies would have to raise prices abroad, lowering them here. Our lower prices are subsidizing the European style socialiized healthcare which everyone points to as being so great. Who will subsidize ours? If China has money to lend us, they have money to pay full price on drugs. Case Closed.
To jjk,
Pharmaceutical companies are GOUGING US. They found the easy path to big money, when we allowed them to start advertising prescription drugs in 1997. Now they spend less on R&D than they do on advertising. See the article below.
A report from the Washington based consumer health organization Families USA takes issue with the drug industry’s claim that present day drug prices are needed to sustain its research and development expenses. To view the report entitled “Off the Charts: Pay, Profits and Spending by the Drug Companies” in its entirety see: http://www.familiesusa.org.
“Most pharmaceutical companies make considerably more in net income than they spend on R&D. Indeed, the pharmaceutical industry continues to be the most profitable U.S. industry, with profit margins in 2000 nearly four times the average of Fortune 500 companies.” The report also discusses the pay and compensation level of the top executives of some of the drug companies. According to the report “All of the nine U.S. pharmaceutical companies that market the top-selling 50 drugs for seniors spent more money on marketing, advertising and administration than they did on R&D.” According to the report the percent of revenue allocated to marketing/advertising and administration compared to percent allocated to R&D is as follows:
Company Mktg/Adv/Adm R&D
Merck 15% 6%
Pfizer Inc. 39% 15%
Bristol-Myers 30% 11%
Pharmacia 37% 15%
Abbott Labs 21% 10%
Wyeth. 38% 13%
Ely Lilly 30% 19%
Schering-Pl 36% 14%
Allergan, Inc. 42% 13%
As you can note from the above, 8 of the 9 companies spent more than twice as much on marketing, administration and advertising as they did on R&D.
When we examine some of the figures from some of the individual drug companies in regards to the increase in the percentage of their revenues spent for marketing and administrative costs we see that it far exceeds the percentage spent on research. In the year 2000 GlaxoSmithKline spent 37.2 % of its revenue on advertising, marketing and administrative costs versus the 13.9% spent on research. Bristol-Myers Squibb spent 30.4% of its revenue in 2000 on advertising, marketing and administrative expenses versus spending 10.6 per cent on research.
Although we have researched and written a great deal about the issue of advertising and the drug industry there are always some interesting new facts that come to our attention. Melody Petersen’s article in the November 23, 2002 issue of the New York Times contained several interesting factual items in connection with this issue.
She states in the article: ” A 1998 survey of named authors writing for some of the nation’s top journals, including The Journal of the American Medical Association, which published the survey, found that 11 percent of the articles had been ghostwritten.” She went on to state that “just $2.8 billion of the $11.8 billion the drug industry spent on marketing was aimed at consumers; the rest paid for everything from dinner meetings with doctors to sales calls and medical education, according to Verispan, a health-care information company.” She concluded the article with the statement: ” In Washington, the FDA’s new chief counsel, Daniel E. Troy, who fought restrictions on drug promotion as a private lawyer, is leading a review of regulations that could relax existing limits on behind-the-scenes marketing of drugs.”
Ad agencies owned by drug companies are playing an ever increasing role in direct-to-consumer (DTC)) ads. DTC ads for prescription drugs were first allowed in 1997. Pharmaceutical companies spent about $2.8 billion on consumer ads for prescription drugs in 2001, which represented about an 8% increase from the spending in 2000. The industry spent about $30 billion in R&D in 2001 up from about $26 billion in 2000.
All the above demonstrates that spending money on advertising is good for the profits of these companies’, their execs, and the ad agencies. It is also a horrible drain on the actual dollar spent on actually providing health care. Instead much of that should be spent on R&D and we should if possible mandate that it be spent so.
……..”drugs, for example — cost much more here than they do in other countries. Reason: They can. Neither the government nor the free market controls them.”
BALONEY!!!….I believe the U.S. government by it’s customs laws DOES make it ILLEGAL for Americans to purchase their prescriptions for pennies on the dollar from foriegn countries, (an interesting position from the so-called land of the free)…..and I am sick and tired of some Doctors who refuse to write prescriptions for generic versions of drugs. I’ll never-ever-ever believe that there is no “deal” between them and the drug companies. It seems every time I am in the waiting room at a Doctor’s office I witness a parade of drug company representatives making visits.
Big-Pharma may or may not be gouging us. But given the advantages of drugs over the alternatives (surgery, amputations, death…), you’d expect to pay a premium for a physically better and longer lasting life. It’s funny that so many can budget out $100 for their cell phone, $50 for their cable, $50 for movies, $400 for eating out; yet can’t find money to carry their own health load, nor find time to get off of their butt and exercise, nor eat healthy. Instead, it’s that damned insurance company or drug company that won’t gimmi pills to fix my clogged arteries and regulate my blood sugar. So many people pushing for nationalized medical also push for choking off energy. Well, if I’m forced to do w/o power, you can do w/o drugs.
Rich,
Once again, you have totally missed the point of the discussion which is why I never resond to you. The discussion is not about advertising, it is about US patients paying higher prices for drugs than patients in other countries. The point is we are subsidizing the socialized programs in other countries by selling them drugs and devices for less than we charge ourselves. If they paid the same prices we did, say in France, their great little healthcare system that liberals always point out as better than ours wouldn’t be so great. The point is we could probably cover the unisured if the cost for drugs and devices were the same price as companies use elsewhere. Get it?
The Post keeps hammering the same old distrortions re US healthcare and the rest of the world. I guess the editors believe the old saying that if you tell a lie over and over again people will finally come to believe it, and the bigger the lie, the better.
The US has a diverse population whose health outcomes can’t be easily compared with more homogenous European states. And Americans pay more for pharmaceuticals because here is where the profits are made that subsidize research and development costs that benefit the whole world. If you want to rant, rant about the fact that, in drug development, as in national defense, Europe and the rest of the world are happy to see the US bear the cost while they reap the benefits. And despite the Post’s propaganda, the pharmaceutical industry is the most heavily regulated enterprise in the country and extremely competitive.
We pay more out of pocket, but other countries pay out more in confiscatory taxes. Canadians aren’t even allowed the OPTION of private health insurance, and care is rationed by the government bureaucracy. If you never get any money IN your wallet, it really doesn’t matter what someone tries to take OUT of it. Me, I’d rather visist the doctor I chose myself, and pay him/her out of my own pocket with my own money.