The Relative (In)Efficiency of the U.S. Health Care System

Featured in print Bulletin on Aging & Health

The U.S. spends more on health care than other wealthy nations - in 2006, health care expenditures were 15 percent of GDP in the U.S., compared to 11 percent in France and Germany, 10 percent in Canada, and 8 percent in the United Kingdom and Japan. Yet health outcomes in the U.S. are generally no better than those in other countries. This has led to concern that the U.S. health care system may be less efficient than those of other countries.

In "Is American Health Care Uniquely Inefficient (NBER Working Paper 14257), researchers Alan Garber and Jonathan Skinner examine whether the apparently inferior performance of the U.S. health care system is real, and the reasons for the observed patterns of expenditures and outcomes.

The authors distinguish between two types of efficiency. Productive efficiency refers to the amount of health that is produced from a given bundle of hospital beds, physicians, nurses, and other inputs. Allocative efficiency refers to whether an additional dollar spent on health care yields benefits that are as valuable to consumers as an additional dollar spent on schools, housing, or other goods. Some degree of allocative inefficiency is inevitable in any health care system, since by shielding consumers from the full cost of medical care, it leads them to consume care whose cost is less than their benefit. The authors ask whether productive and allocative efficiency are lower in the U.S. than in other developed countries.

Turning first to productive efficiency, the authors note that the finding that the U.S. has higher health care spending but similar health outcomes to other countries is consistent with two possible explanations. The first is that the health care production function is quite flat in this range, meaning that consuming additional health care services yields little or no health benefits. The second is that the U.S. is on a lower health care production function (is less productively efficient) than other countries. Distinguishing between these explanations has important policy implications - the first implies that reducing U.S. health care spending would not adversely affect health outcomes, while the second implies that it would do so.

Comparing health care production functions across countries is challenging because behavior and genetics, along with a host of other factors, in addition to the health systems, are responsible for variation in health outcomes at the national level. The authors use four proxies for the delivery of cost-effective health care and compare these measures across countries. The U.S. is about average in the fraction of the elderly receiving immunizations for influenza (a highly cost-effective treatment), but has the highest fraction of chronically ill patients who skip recommended care because of cost. The U.S. lags behind many other countries in the fraction of primary care physicians using electronic medical records and has the highest administrative costs per capita. While administrative costs are often blamed for lower health care productivity in the U.S., the authors note that these expenses are not large enough to explain differences in spending between the U.S. and other countries, nor can they explain why expenditures are growing more rapidly in the U.S.

The authors next turn their attention to allocative efficiency, asking whether Americans consume "too much" health care. Comparing several indirect measures of health care consumption across countries, they find mixed results. The U.S. is about average in the number of acute hospital beds and practicing physicians per capita and in prescription drug use. However, the number of MRI machines per capita in the U.S. is about five times higher than in most other wealthy countries, though lower than in Japan. Both the rate of invasive and expensive treatments (such as particular coronary procedures) and the intensity of care per day of hospitalization are higher in the U.S. than in other countries.

To examine whether U.S. health care expenditures represent money well spent, the authors delve into the literature on the cost-effectiveness of health care spending. They conclude that most of the gains in survival over the last few decades in the U.S. came from improvements in health behaviors and from the use of low-cost health interventions, such as treating heart disease with aspirin and beta blockers. By constrast, more recent gains in survival come from high-tech interventions that are also high cost - the authors estimate the cost at over $250,000 per life year saved.

To see whether this pattern is unique to the U.S., the authors contrast increases over time in health care costs and outcomes in the U.S. with those in other countries. They find that increases in spending in the U.S. have greatly outpaced those in other countries, while improvements in life expectancy have been similar, if not slightly worse. The authors argue that the diffusion and adoption of new technology, fueled by favorable reimbursement rates, are the most compelling explanation for the more rapid rise in health care costs in the U.S.

Does the production function embodied in the U.S. health care system lie below that for other countries? The current U.S. health care system features dramatic differences in health care utilization by region, socioeconomic status, race, and insurance coverage status. If care were provided more uniformly, the authors argue, population-level health outcomes could improve somewhat, and similarly for the adoption of electronic records or the expansion of universal insurance coverage. While these reforms would likely save some lives and in some cases might enhance productive efficiency, the authors doubt that these reforms would reduce expenditures overall. In order to really address the cost problems, they argue, allocative efficiency should be improved, which is considerably more difficult to effect politically.

How do the benefits of additional health care spending compare to the benefits that could be obtained by increasing spending elsewhere, and is this comparison less favorable for the U.S. than for other countries? The authors suggest that "what sets the U.S. apart is a combination of incentives for the overuse of some services and underuse of others in a predominantly fee-for-service system, coupled with few supply-side constraints." The dynamic effects of these incentives may be profound, as insurance coverage is extended to technologies without regard to their proven benefits or cost.

The authors conclude "perhaps the greatest hope for improving both allocative and productive efficiency will come from efforts to measure and reward accurately outcome productivity - improving health outcomes using cost-effective management of diseases - rather than rewarding on basis of unit service productivity for profitable stents, caesarian-sections, and diagnostic imaging regardless of their impact on health outcomes. This will require rethinking what we pay physicians and hospitals and most importantly how to measure and pay for outcomes rather than inputs."

The work of both authors is supported by Investigator Awards in Health Policy Research from the Robert Wood Johnson Foundation. Garber gratefully acknowledges support from the National Institute on Aging (P30 AG17253 and P01 AG05842) and from the Department of Veterans Affairs, and Skinner gratefully acknowledges support from the National Institute on Aging (P01 AG19783).