We hear endlessly that Canadians have to wait longer than Americans for hip replacements, which is true. But that’s a peculiar example to choose, because most hip replacements in America are paid for by Medicare. Now, Medicare is a government program, although it’s not clear if everyone knows that—health policy experts often repeat the story of how former Senator John Breaux was accosted by a constituent who urged him not to let the government get its hands on Medicare. The point, however, is that the hip-replacement gap is a comparison of two government insurance systems, with the U.S. system more lavishly funded. It has nothing to do with the alleged virtues of private enterprise.
More seriously, there is some question about the extent to which the American lifestyle drives up health care expenses. Ezra Klein of The American Prospect calls it the “but-we-eat-more-cheeseburgers” doctrine, and it’s true that Americans are more prone to obesity than Europeans, which in turn tends to raise medical costs, especially for chronic conditions like diabetes. Attempts to crunch the numbers, however, suggest that different lifestyles, and the diseases to which they make us prone, aren’t enough to explain more than a small fraction of the cost gap between the United States and everyone else. A study by McKinsey Global Institute estimates that the difference in disease mix between the United States and other advanced countries accounts for less than $25 billion in annual treatment costs, or less than $100 of the roughly $3,000 per person extra the United States spends on health care each year.[5]
There’s one more thing you should know: although America spends much more on health care than anyone else, this doesn’t seem to buy significantly more care. By measures such as the number of doctors per 100,000 people, the average number of doctors’ visits, the number of days spent in the hospital, the quantity of prescription drugs we consume, and so on, American health care does not stand out from health care in other rich countries.[6] We’re off the charts in terms of what we pay for care, but only in the middle of the pack in terms of what we actually get for our money.
All of this tells us that the U.S. health care system is wildly inefficient. But how does a can-do country, at the cutting edge of technology in many fields, manage to have such an inefficient health care system? The main answer is that we’ve stumbled into a system in which large sums of money are spent not on providing health care, but on denying it.
Possibly the best way to understand the U.S. health care mess is to look at the difference between what we—by which I mean the great majority of Americans—want our system to do, and what the system, as it currently works, gives the main players an incentive to do.
As I’ve argued, there’s a near-consensus that all Americans should receive basic health care. Those who believe otherwise keep their beliefs private, because saying that it’s okay to deny care to someone because he or she was born poor, or with the wrong genes, is politically unacceptable. Private insurance companies, however, don’t make money by paying for health care. They make money by collecting premiums while not paying for health care, to the extent that they can get away with it. Indeed, in the health insurance industry actual payments for care, such as paying the cost of a major operation, are literally referred to as “medical losses.”
Insurance companies try to hold down those unfortunate medical losses in two principal ways. One is through “risk selection,” otherwise known, rather obscurely, as “underwriting.” Both are euphemistic terms for refusing to sell insurance to people who are likely to need it—or charging them a very high price. When they can, insurers carefully screen applicants for indications that they are likely to need expensive care—family history, nature of employment, and, above all, preexisting conditions. Any indication that an applicant is more likely than average to have high medical costs, and any chance of affordable insurance goes out the window.
If someone who makes it through the process of risk selection nonetheless needs care, there’s a second line of defense: Insurers look for ways not to pay. They pick through the patient’s medical history to see if they can claim that there was some preexisting condition he or she failed to disclose, invalidating the insurance. More important in most cases, they challenge the claims submitted by doctors and hospitals, trying to find reasons why the treatment offered wasn’t their responsibility.
Insurers don’t do all this because they’re evil people. They do it because the structure of the system leaves them little choice. A nice insurance company, one that didn’t try to screen out costly clients and didn’t look for ways to avoid paying for care, would attract mainly high-risk clients, leaving it stuck with all the expenses other insurers were trying to avoid, and would quickly go out of business. If the people doing all this aren’t evil, however, the consequences are. Remember, there’s an almost universal belief that everyone should have adequate health care, which means having adequate insurance—but the way our system works, millions of people are denied insurance or offered it only at unaffordable prices. At the same time insurance companies spend huge sums screening applicants and fighting over payment. And health care providers, including doctors and hospitals, spend huge sums dealing and fighting with insurance companies to get paid. There’s a whole industry known as “denial management”: Companies that help doctors argue with insurance companies when payment is denied.
None of these costs arise in a universal health care system in which the government acts as insurer. If everyone is entitled to health insurance, there’s no need to screen people to eliminate high-risk clients. If a government agency provides insurance, there’s no need to fight over who pays for a medical procedure: If it’s a covered procedure the government pays. As a result government health insurance programs are much less bureaucratic and spend much less on administration than do private insurers. For example, Medicare spends only about 2 percent of its funds on administration; for private insurers the figure is about 15 percent. McKinsey Global estimates that in 2003 the extra administrative costs of the U.S. health insurance industry, as compared with the costs of the government insurance programs in other countries, ran to $84 billion.
And that literally isn’t the half of it. As the McKinsey report acknowledges, “This total does not include the additional administrative burden of the multipayor structure and insurance products on hospitals and outpatient centers…. Nor does it include the extra costs incurred by employers because of the need for robust human resources departments to administer health care benefits.”[7] One widely cited comparison of the U.S. and Canadian systems that tried to estimate these other costs concluded that in the United States total administrative cost—including both the costs of insurers and those of health care providers—accounts for 31 percent of health spending, compared with less than 17 percent in Canada. That would amount to around $300 billion in excess costs, or about a third of the difference between U.S. and Canadian spending.[8]
Where did the rest of the money go? Unlike other advanced countries, the United States doesn’t have a centralized agency bargaining with pharmaceutical companies over drug prices. As a result America actually uses fewer drugs per person than the average foreign country but pays far more, adding $100 billion or more to the overall cost of health care. There are also a variety of subtler inefficiencies in the U.S. system, such as perverse financial incentives that have led to a proliferation of outpatient CT scan facilities where the expensive equipment gets relatively little use.
5.
McKinsey Global Institute,
6.
Gerard F. Anderson et al., “It’s the Prices, Stupid: Why the U.S. Is So Different from Other Countries,”
8.
Steffie Woolhandler, Terry Campbell, and David U. Himmelstein, “Costs of Health Care Administration in the United States and Canada,”