Other countries spend less on health care than we do yet spend a larger share through the public sector. What’s the connection? (Jonathan Alcorn/Reuters)
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of 'The Reconnection Agenda: Reuniting Growth and Prosperity'.

Though it’s getting better, the U.S. health-care system is uniquely inefficient. We spend far more than other countries on everything from hospital stays to MRIs to prescriptions to end-of-life care. It’s also the case that private-sector spending makes up a much larger share of health spending here than it does in other advanced economies.

Are these two facts causally related? The figure below — well known to health-care economists but still worth trotting out — plots their intersection, with the public share of health spending on the Y-axis and the GDP share on the X-axis. Each dot is a country.

The U.S. position in the figure — highest on health spending/GDP; lowest on public share —presents us with the very picture of an outlier.

Correlation not being causation, you are within your rights to argue that this doesn’t prove that more private sector means less efficient health care. It could be that people here demand more health care than in those other economies, and because its consumption is not so tightly controlled by the state, they can get it.

It’s certainly true that we in the United States consume more health care, though for all we spend, we don’t have better health outcomes than those in other advanced economies, all of whom spend less per capita (it’s not that we see the doctor more; it’s that when we do, our treatment is more extensive). The sources of our higher costs are well known, and there’s a decent case to be made that they relate to our disproportionate private-spending share.

For example, administrative costs account for about a quarter of U.S. health spending, twice the share in other advanced countries. The reason has to do with our multitude of insurers, plans and health-care providers, all trying to get the best deal for themselves, fighting against a large industry trying to do the same thing in reverse.

Surprisingly, the insurers don’t always win these fights; their profit margins are lower than you’d think. But this process still creates huge inefficiencies that are less prevalent in other systems in which more public dollars lead to greater bargaining power by the state and thus more effective cost controls. And, of course, single-payer public systems, such as traditional Medicare, have the lowest administrative costs (critics sometimes show higher Medicare administrative costs by adding in the parts of the program that go through private insurers, further underscoring my point).

Our relatively privatized system also gives us less control over prices, though that’s improving a bit. But drug costs are much higher here, as are high-tech treatments: The cost of an MRI is almost four times as high in the United States as it is in France. Also, private systems tend more toward “fee for service,” incentivizing quantity over quality, a problem that health-care reform is trying to tackle (e.g., through “medical homes” and bundled care systems).

It may be possible to fix the inefficiencies and keep half of the U.S. system in private hands. That surely was a goal of the Affordable Care Act, as it was clear for political reasons that the legislation needed support from private stakeholders if it was going to pass. But my hunch is that it would be hard to move that U.S. dot to the left on the X-axis without also moving it higher on the Y-axis. That’s certainly what I took away from health economist David Cutler’s recent and excellent (and highly readable) analysis of these issues.

In other words, I think a northwesterly move for our dot on the graph is more practical than a pure westerly move.

Health care spending in advanced economies: share of GDP and public share of expenditures


Source: GS Research