Andrew Sullivan has been running something of an anecdata series on "why healthcare costs so much." Some of the posts have been quite good, like this missive on Sweden and this explanation of the "Burger King"-ethos that pervades emergency rooms. But there are rigorous examinations of this question that also deserve a look.In February 2007, the nonpartisan McKinsey Group released a study called "Accounting for the Cost of Health Care in the United States." The idea, as the title suggests, was to figure out why we pay so much more than any other developed country. To do this, McKinsey constructed the Estimated Spending According to Wealth (ESAW) index, which adjusts cross-national health spending for increases in per capita earnings and creates a clean baseline for comparisons. On this metric, we overpay by about $477 billion per year, or $1,645 per capita. The question is why. We can rule out a couple of hypotheses. McKinsey estimates that the difference is not sicker Americans. Differences in diseases account for only $25 billion of the variation -- about 5 percent of the total. Nor is it that we use more health care services. McKinsey examined inpatient hospital procedures to get a sense of how treatment volume compares. America averaged 88 procedures per 1,000 residents per year. That's higher than the OECD average of 75, but it's not as high as Germany's 97 treatments per 1,000 residents, or Switzerland's 98 treatments per 1,000 residents, and both countries spend much less on health care than the United States.The answer, in the end, is that we're getting a bad deal. You know how when you go shopping you look for sales? America sort of does the opposite of that. We pay more for each unit of care, more for health system operations, and more for health system administration. McKinsey found that "input costs—including doctors’ and nurses’ salaries, drugs, devices, and other medical supplies, and the profits of private participants in the system—explain the largest portion of high additional spending, accounting for $281 billion of spending above US ESAW. Inefficiencies and complexity in the system’s operational processes and structure account for the second largest spend above ESAW of $147 billion. Finally, administration, regulation, and intermediation of the system cost another $98 billion in additional spending." You'll notice that that adds up to $551 billion, not $477 billion. The discrepancy comes from the fact that we actually save some money on long term care.But saying that American health care is so expensive because it costs so much more borders on the tautological. The question is why we allow it to cost so much more. I'll get to that in a follow-up post. WHY AMERICAN HEALTH CARE COSTS SO MUCH: PART ONE.
Andrew Sullivan has been running something of an anecdata series on "why healthcare costs so much." Some of the posts have been quite good, like this missive on Sweden and this explanation of the "Burger King"-ethos that pervades emergency rooms. But there are rigorous examinations of this question that also deserve a look.In February 2007, the nonpartisan McKinsey Group released a study called "Accounting for the Cost of Health Care in the United States." The idea, as the title suggests, was to figure out why we pay so much more than any other developed country. To do this, McKinsey constructed the Estimated Spending According to Wealth (ESAW) index, which adjusts cross-national health spending for increases in per capita earnings and creates a clean baseline for comparisons. On this metric, we overpay by about $477 billion per year, or $1,645 per capita. The question is why. We can rule out a couple of hypotheses. McKinsey estimates that the difference is not sicker Americans. Differences in diseases account for only $25 billion of the variation -- about 5 percent of the total. Nor is it that we use more health care services. McKinsey examined inpatient hospital procedures to get a sense of how treatment volume compares. America averaged 88 procedures per 1,000 residents per year. That's higher than the OECD average of 75, but it's not as high as Germany's 97 treatments per 1,000 residents, or Switzerland's 98 treatments per 1,000 residents, and both countries spend much less on health care than the United States.The answer, in the end, is that we're getting a bad deal. You know how when you go shopping you look for sales? America sort of does the opposite of that. We pay more for each unit of care, more for health system operations, and more for health system administration. McKinsey found that "input costs—including doctors’ and nurses’ salaries, drugs, devices, and other medical supplies, and the profits of private participants in the system—explain the largest portion of high additional spending, accounting for $281 billion of spending above US ESAW. Inefficiencies and complexity in the system’s operational processes and structure account for the second largest spend above ESAW of $147 billion. Finally, administration, regulation, and intermediation of the system cost another $98 billion in additional spending." You'll notice that that adds up to $551 billion, not $477 billion. The discrepancy comes from the fact that we actually save some money on long term care.But saying that American health care is so expensive because it costs so much more borders on the tautological. The question is why we allow it to cost so much more. I'll get to that in a follow-up post. 
