Why do we spend so much on health care?

I get this question a lot (I usually say we need more research, would you like to give me a grant?.....) However, Aaron Carol, over at the Incidental Economist yesterday began a 10 part series addressing this question, and providing an answer. The first post is an overview, and he frames the issue by pointing out the strong correlation between a nation's wealth and its GDP per capita (how productive the nation's economy turns out to be). The USA has the largest GDP/capita in the world, so it is not surprising we spend the most per capita on health care. The relationship between GDP/capita and health care spending/capita is shown in this graph, which is a part of a report by consulting firm McKinsey titled "Accounting for the cost of U.S. health care: a new look at why Americans spend more. (from Nov. 2008)" The report addresses in a matter of fact manner why we spend so much on health care in the U.S., as compared to other high income nations.

Given the wealth of our nation, it is basically inevitable that we will spend the most on health care, as virtually all nations invest more in health on a per capita basis as their wealth grows. What is truly remarkable is how much more the U.S. spends compared to other high income nations. The really hard question is whether we get our monies worth for the extra spending?

The U.S. in 2006 spent around $650 Billion more on health care than the GDP/capita and health spending/capita relationship would suggest; this year that number is likely around $750 Billion. This is the extra spending beyond what wealth predicts that makes the U.S. the most expensive in the world by far in terms of health care expenditures per capita.

The McKinsey report (and Aaron Carol) focuses on where the money is going, meaning literally where are we spending the extra dollars beyond what is predicted by wealth levels on a per capita basis? In post 2, Carol describes that inpatient spending is actually not the part of the system that is driving the spending gap between the U.S. and other nations; that accounts for 'only' $40 Billion of the $650 billion gap in 2006. Beneath these numbers are some interesting findings; Americans are less likely to go into a hospital than persons from other nations (we do more in outpatient settings), to stay fewer days in a hospital given that we go, but when we do go to hospitals, we spend a lot more per day.

The most important question that needs to be asked when looking at how much we spend in the U.S.: are we getting our monies worth? Meaning do we have a higher quality of life and/or live longer with the extra spending than we would without it? Carol plans a further series looking at this and related questions, but it is certainly not obvious that we do get our monies worth (in terms of quality of life gains and/or life extensions) for our extra spending, but that is easier to conclude than figuring out how to lessen spending.

If you have ever said 'we spend too much in health care' 'our system in unsustainable' 'we are spending ourselves into oblivion and saddling our kids with too much debt' then whether you realize it or not the two questions you want answered are "how much of this excess $750 Billion we will spend this year could be cut without harming patients?" and "how will we figure this out?"