by John Goodman, NCPA

The conventional wisdom in health policy is that the United States spends far more than any other country and enjoys mediocre health outcomes. This judgment is repeated so often and so forcefully that you will almost never see it questioned. And yet it may not be true.

Indeed, the reverse may be true. We may be spending less and getting more.

The case for the critics was bolstered last week by a new OECD report that concluded:

The United States spends two-and-a-half times more than the OECD average health expenditure per person … It even spends twice as much as France, for example, a country which is generally accepted as having very good health services. At 17.4% of GDP in 2009, U.S. health spending is half as much again as any other country, and nearly twice the average.

Similar claims were made recently in The New York Times by former White House health advisor, Zeke Emanuel, who added that we are not getting better health care as a result. The same charge was aired at the Health Affairs blog the other day by Obama Social Security Advisory Board appointee Henry Aaron and health economist Paul Ginsburg. It is standard fare at Ezra Klein’s blog, at The Incidental Economist and at the Commonwealth Fund. It is also unquestioned dogma for New York Times columnist, Paul Krugman.

What are all these people missing? On the spending side, they are overlooking one of the most basic concepts in all of economics. 

When you and I buy something, the cost to us is the price we pay for it. But that is not necessarily true for society as a whole. The social cost of something may be a whole lot more or a whole lot less than what people actually spend on it; and that is especially true in health care.

In the United States and throughout the developed world, the market for medical care has been so systematically suppressed that no one ever sees a real price for anything. Patients never see the real price of the care they receive; doctors never receive a real price for the care they deliver; employees never see a real premium for their health insurance, etc.

In the United States, for example, a typical doctor is paid one fee by Medicare, a different fee by Medicaid, and a third fee by BlueCross. Moreover, there are different fees for all the other insurers and for all the employer plans. These fees do not count as real market prices, however. Instead, they are artificial payments that often reflect the bargaining power of the various payer bureaucracies. When government accountants sum up all the spending on health care, therefore, they are adding artificial price times quantity, for all the separate transactions, to arrive at a grand spending total.

Here is the kicker: since each separate purchase involves an artificial price, no one knows what the aggregate number really means. To make matters worse, other countries are more aggressive than we are at shifting costs and hiding costs. They use their buying power to suppress the incomes of doctors, nurses and other medical personnel much more than the United States does, for example. In addition, formal accounting ignores the cost of rationing in other countries. In Greece, patients spend nearly as much on bribes and other “informal” payments as they do on “formal” costs such as insurance co-pays. Yet these bribes do not show up in the official statistics. Bottom line: in comparing international spending totals, we are usually comparing apples and oranges.

Let’s take doctor incomes and government health care programs. One way to pay doctors is to pay market prices — whatever fees are necessary in order to induce them to voluntarily provide medical services. Another way is to draft them and pay them little more than a minimum wage — as the government has done in the past in times of war. Obviously, the second method involves a lot lower spending figure. But to economists, the social cost is the same in both cases.

The reason? To economists, the social cost of having one more man or woman become a doctor is the next best use of that person’s talents. Instead of becoming a doctor, the pre-med student might have become an engineer, say, or an architect. So what society as a whole must give up in order to have one more doctor is the loss of the engineering or architectural goods and services the young man or woman would otherwise have produced. This cost, called “opportunity cost,” is independent of how much doctors actually get paid.

The principle also applies to other medical personnel and to buildings and equipment. The opportunity cost of a hospital, for example, is the value of a commercial office building or some other use to which those same resources could be put.

The concept of opportunity cost allows us to see that if we don’t trust spending totals in the international accounts, there is another way to assess the cost of health care. We can count up the real resources being used. Other things equal, a country that has more doctors per capita, more hospital beds, etc., is devoting more of its real income to health care than one that uses fewer resources — regardless of its reported spending.

On this score, the United States looks really good. As the table below (from the latest OECD report) shows, the U.S. has fewer doctors, fewer physician visits, fewer hospital beds, fewer hospital stays and less time in the hospital than the OECD average. We’re not just a little bit lower. We are among the lowest in the developed world. In fact, about the only area where we “spend” more is on technology (MRI and CT scans, for example), as is reflected in the second table.

Almost a decade ago, Mark Pauly estimated the cost of health care across different countries based on the use of labor (doctors, nurses, etc.) alone. The finding: The U.S. spends a lot less than such northern European countries as Iceland, Sweden and Norway and even less than Germany and France!

What about outcomes? Do we get more and better care for the resources we devote? Here the evidence is mixed. As the second table shows, we replace more knees per capita than any other country and it’s hard to believe that any of these are unnecessary procedures. On the other hand, if you think that there are too many tonsillectomies and Caesarean births, our ranking there (2nd and 8th, respectively), may be less admirable. Avik Roy has a nice presentation of cancer survival rates. The U.S. basically leads the world.

What about life expectancy statistics — a favorite of the critics, since Americans don’t score very high? It turns out that when you remove outcomes doctors have almost no impact on — death from fatal injuries (car accidents, violent crime, etc.) — U.S. life expectancy jumps from 19th in the world to number one!

This isn’t to say we don’t have problems. There is a lot of evidence of waste and inefficiency in U.S. health care. Still, it’s not clear that we have any reason to feel inferior to the rest of the world.

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Link: DISCUSSION