Why are Americans spending so much of GDP on health care?
The United States devotes a lot more of its economic resources to health care than any other nation, and yet its health care outcomes are not better for it.
That has not always been the case. America was in the realm of other countries in per-capita health spending through about 1980. Then it diverged.
It is the same story with health spending as a fraction of gross domestic product. Likewise, life expectancy. In 1980, the U.S. was right in the middle of the pack of peer nations in life expectancy at birth. But by the mid-2000s, we were at the bottom of the pack. What happened? For spending, many experts point to differences in public policy on health care financing. “Other countries have been able to put limits on health care prices and spending” with government policies, said Paul Starr, professor of sociology and public affairs at Princeton. The U.S. has relied more on market forces, which have been less effective.
“Confronted with fiscal pressures, as the share of GDP absorbed by health care spending began to get serious, other nations had mechanisms to hold down spending,” said Henry Aaron, a health economist with the Brookings Institution. “We didn’t.”
One result: Prices for health care goods and services are much higher in the U.S. Gerard Anderson, a professor at Johns Hopkins and a lead author of a Health Affairs study on the subject, emphasized this point. “The differential between what the U.S. and other industrialized countries pay for prescriptions and for hospital and physician services continues to widen over time,” he said. Other studies also support this idea. However, by some measures, growth in the amount of health care consumed has also been a factor.
The degree of competition, or lack thereof, in the U.S. health system plays a role. A recent study by economists at the University of Miami found that periods of rapid growth in U.S. health care spending coincide with rapid growth in markups of health care prices. This is what one would expect in markets with low levels of competition.
The additional costs associated with many insurers, each requiring different billing documentation, adds inefficiency, according to Harvard health economist David Cutler. According to a recent study, the U.S. has higher health care administrative costs than other wealthy countries.
But none of this explains the timing of the spending divergence. Why did it start around 1980?
Starr suggests the high inflation of the late ’70s contributed to growth in health care spending, which other countries had more systems in place to control. Likewise, Cutler points to related economic events before 1980 as contributing factors. The oil price shocks of the 1970s hurt economic growth, straining countries’ ability to afford health care.
Later on, once those spending constraints eased, “suppliers of medical inputs marketed very costly technological innovations with gusto,” Aaron said. They “found ready customers in hospitals, medical practices and other entities eager to keep up with rivals in the medical arms race.”
The last third of the 20th century or so was a fertile time for expensive health care innovation. Yet being an engine for innovation does not necessarily translate into better outcomes. Almost no matter how it is measured, longevity in the United States has not kept pace with that of other nations. Again, the inflection point is around 1980. Why?
The lack of universal health coverage and less safety net support for low-income populations could have something to do with it, speculated Sherry Glied, an economist and a dean at New York University. “The most efficient way to improve population health is to focus on those at the bottom,” she said. “But we don’t do as much for them as other countries.”
Ashish Jha, a physician with the Harvard T.H. Chan School of Public Health and the director of the Harvard Global Health Institute, is hopeful things might change: “For starters, we could have a lot more competition in health care. And government programs should often pay less than they do.” He added that if savings could be reaped from these approaches, and others — and reinvested in improving the welfare of lower-income Americans — we might close both the spending and longevity gaps.