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May 18, 2018

1980: The year that US health care spending 'went kaflooey'

Daily Briefing

    The United States allocates more of its economic resources toward health care than any other country, and fares far worse on several health outcomes—but this wasn't always the case, Austin Frakt writes for the New York Times' "The Upshot."

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    A break in trends

    In 1980, the United States ranked toward the middle in terms of per-capita health spending and life expectancy at birth, when compared with peer countries, Frakt writes. But since then, U.S. health spending as a fraction of gross domestic product (GDP) has grown larger than that of peer countries, while the nation's life expectancy has fallen behind. In a separate piece in the Incidental Economist, Frakt writes, "things went kaflooey (to put it technically)." Meanwhile, in other countries, increased health spending coincided with significant increases in life expectancy.

    Frakt explains that health outcomes, particularly life expectancy, and health spending are not necessarily tied—which is why they should be considered separately.

    Why the US spends more on health care

    Several factors played a role in how the United States' health care spending outstripped those of its peer countries, including market factors and larger administration costs, Frakt writes.

    For instance, Paul Starr, a professor of sociology and public affairs at Princeton University, pointed to the difference between how the United States and other countries approach health care price controls. "Other countries have been able to put limits on health care prices and spending" through government policies, Starr said. By contrast, the United States has generally relied on market forces to control prices and spending—which have been ineffective at containing prices and spending, Frakt notes.

    Janet Currie, a Princeton health economist, explained that while the United States has large public health care programs, such as Medicare, it doesn't have the ability to cap prices. For instance, she noted Medicare is prohibited from negotiating the prices of drugs.

    Without appropriate mechanisms to reign in spending, Frakt writes, the United States has higher prices for health care goods and services than other countries.

    Reduced market competition in the United States has also played a role in the rise of U.S. health care spending, according to Frakt. For instance, economists at the University of Miami in a recent study found "periods of rapid growth in U.S. health care spending coincide with rapid growth in markups of health care prices," Frakt writes—a phenomenon that would be expected in markets with less competition, he adds.

    Frakt also cites a recent study that found the United States has higher administrative costs for health care, when compared with other countries. To explain the discrepancy in administrative costs between the United States and abroad he points to Harvard University health economist David Cutler who found the billing documentation required by the numerous U.S. insurers creates additional costs and inefficiency.

    According to Frakt, Starr and Cutler suggest the spending divergence began in the 1980s because of a series of related economic events in the late 19070s that triggered global spending constraints. Cutler explained, "[A]ll across the world, one sees constraints on payment, technology, etc., in the 1970s and 1980s"—but those constraints were weaker in the United States, Frakt writes. And Henry Aaron, a health economist with the Brookings Institution explained that when those constraints diminished, "Suppliers of medical inputs marketed very costly technological innovations with gusto" and "found ready customers in hospitals, medical practices, and other entities eager to keep up with rivals in the medical arms race."

    Sherry Glied, an economist and a dean at New York University, said costly health care innovations from the late 20th century include coronary artery bypass grafting and drug treatments for HIV and premature babies. According to Frakt, these innovations proved valuable, but came at a high price. Frakt explains that the willingness of the U.S. market to pay for such innovations made the United States "an attractive market for innovation in health care."

    How the United States fell behind on life expectancy

    But health care innovation does not necessarily result in better overall health outcomes, Frakt writes, adding that "longevity in the United States has not kept pace with that of other nations."

    Some experts have suggested the United States' poor performance on life expectancy is linked to the nation's lack of a universal health insurance and lower spending on safety net programs. For instance, a report by RAND found that the United States in 1980 spent 11% of its GDP on social programs, barring health care. In comparison, members of the European Union spent about an average of 15%. In 2011, the United States spent 16% and members of the EU spent 22%.

    John Hopkins University's Gerard Anderson said, "Social underfunding probably has more long-term implications than underinvestment in medical care." He said, "If the underspending is on early childhood education—one of the key socioeconomic determinants of health—then there are long-term implications"

    Glied said, "The most efficient way to improve population health is to focus on those at the bottom. But we don't do as much for them as other countries."

    Bending the curve

    Ashish Jha, a physician and director of the Harvard Global Health Institute, pointed to several ways the United States could reduce spending an improve outcomes. "For starters, we could have a lot more competition in health care. And government programs should often pay less than they do." He added that if the United States generated savings from those and other approaches and then invested in programs to help low-income U.S. residents, the country then could see spending and life expectancy gaps close.

    Frakt writes, "Even if we can't fully explain why the United States diverged in terms of health care spending and outcomes after 1980, one thing is clear: History demonstrates that it is possible for the U.S. health system to perform on par with other wealthy countries. That doesn't mean it's a simple matter to return to international parity" (Frakt, "The Upshot," New York Times, 5/14; Frakt, Incidental Economist, 5/14).

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