The late healthcare economist Uwe Reinhardt once quipped about why healthcare costs are so high, “It’s the prices, stupid.” Add to that the reality that our United States population health outcomes are just not fabulous and neither is our overall health coverage.
Those realities were confirmed by The Commonwealth Fund’s “Mirror, Mirror 2017” report that finds we spend more (much more) than other high-income countries, yet we have poorer health. We don’t deliver enough timely and accessible care, and our lack of access to primary care in particular sets off a chain reaction of problems.
The Centers for Medicare & Medicaid Services (CMS) says that in 2016, healthcare spending reached $3.3 trillion, nearly 18 percent of the Gross Domestic Product.
Here in the United States, we spend almost twice as much on medical care as other such as the United Kingdom, Canada and Germany, among others. Our utilization rates, however, are similar to those other nations’, says a new March 2018 study in JAMA that breaks it all down. A study co-author told The Guardian our prices are the “800-pound gorilla.”
Americans average $9,403 per person annually in per capita healthcare spending, the Germans and Dutch, $5,782 and $5,202 respectively, by comparison.
The Cost and Price Equation
Let’s take a look at areas in which cost-cutting measures would have the greatest impact—knowing that not everyone agrees.
In well-publicized editorial response to the study, Ezekiel J. Emanuel, M.D., Ph.D. reminds us that healthcare costs are prices multiplied by volume. Wrap your head around that and you still must ask: What’s driving the difference in cost? That would be costs of labor and goods, not surprisingly, with pharmaceuticals the dearest of “goods.” Next come administrative costs. Here’s more:
- Physicians’ salaries: Study respondents differ in their opinions about doctors’ pay being a driver. Emanuel says no way, because here in America we have 2.6 physicians per 1000 people, Germany has 4.1 and Sweden 4.2. So that means even though our salaries are high, per capita costs to pay physicians nearly matches that of Germany.
In another editorial response to the study, Stephen T. Parente, Ph.D. notes that the mean specialist salary here is $316,000, while in Germany, it’s $181,243. In Switzerland, he says, the whole country follows one fee schedule with no network negotiation by insurers. A Swiss medical education is courtesy of the government, so new doctors aren’t crushed by loans. Expensive malpractice premiums here also rate as an influential factor.
- Pharmaceuticals (brand-name drugs): The study puts total pharmaceutical expenditures in the U.S. at $1,443 per capita, Germany at $667 and Sweden at $556. They’re all almost a result of price, Emanuel says, not volume. “No other category accounts for as much of the cost difference as pharmaceuticals.”
We spend more on medication than any other country. The Commonwealth Fund cites these as just some of the major factors influencing our high drug prices:
- High launch prices and high annual increases for patented brand-name drugs.
- Brand-name drugs, with Orphan Drug Act market exclusivities, are introduced with high launch prices and experience high annual price increases.
- Some manufacturers create or take advantage of, natural monopolies for drugs that enable them to significantly increase prices.
- The lack of robust competition among manufacturers of generic drugs results in less price competition and higher prices.
- The lack of price competition among biologics and biosimilars results in higher prices.
- Anticompetitive behavior by some manufacturers undermines competition, resulting in higher prices.
- Some manufacturers use current patent-protection policies for brand-name drugs to extend monopoly pricing.
- Patients, providers, and payers lack information about the comparative effectiveness of drugs at the point in time when critical health care decisions are made.
- The pharmaceutical distribution system does not make essential pricing information available to patients, providers, and payers at the point of care—information that patients and their providers need when deciding on the best course of treatment.
- Federal law imposes limitations on state authority to negotiate prices for Medicaid and implement other price-related measures to reduce high drug prices.
In mid-February, CMS released national health expenditure projections that said growth in prices for healthcare goods and services will rise to 2.2 percent in 2018 because of projected prescription drug price growth. No, costs are not going down.
- Administrative costs (Emanuel calls them “bloat”.): Ours are 8 percent versus the 3 percent average in peer countries. Emanuel says we need to get a grip—the financial kind—since our tally is $752 per capita of Americans’ annual health care spending, versus a seemingly meager $208 in the Netherlands and $232 in Germany.
He says this could free up hundreds of billions of dollars for better social uses—a welcome concept almost anywhere.
- Procedures (high-margin, high-volume): The cost of these here, compared to other high-income countries, results from high prices and high volumes, says Emanuel. Angioplasty per-capita costs are $69.20, while the Netherlands’ is $13.10. The U.S. is second in terms of numbers performed.
Knee replacements are at per capita $57.40 vs. $14.90 in the Netherlands. A cesarean delivery rates per capita at $61.80 versus $8.90 in the Netherlands, but American women undergo twice as many as that country—a major difference in volume.
- Imaging: The U.S. performs way more CTs than any other country, and is number two in MRIs. Volume here is 245 per 1,000 population. Our abdominal scan costs $896, so it’s $220 per capita here and $23 per capita in the Netherlands.
Emanuel did the math, and it’s pretty convincing. He says that “If we…could lower the prices and per-capita volumes of our CT scans, MRIs, and just the top 25 high-volume-high-price surgical procedures to those of the Netherlands, for example, we would see savings of about $425 per capita, or a total of $137 billion,” Emanuel said.
Let’s get started, shall we?