Why do Americans pay more for healthcare than the English?

The example of childbirth, which is a very common procedure, can be used as a comparison tool of the different healthcare systems. Truvian Analytics did a study and found that in the U.S. the average cost of a vaginal birth was $30,000 and a caesarean section comes in at $50,000. The average cost to deliver in the Lindo Wing of St. Mary’s Hospital, where the Duchess of Cambridge gave birth to a son, was $15,000. The heir to the throne was delivered at a cheaper rate than most children in the U.S.. Much cheaper when considering that one out of three women in the U.S., compared to one out of four in the U.K., give birth via caesarean section, according to the World Health Organization. WHO recommends that ten to fifteen percent of the population give birth via caesarean section. This reinforces that there must be an efficiency issue with the system.

It will be shown that quality is not the factor that determines an almost three times larger cost for Americans. Below is a comparison of the U.S. and U.K., the 2013 statistics are from World Health Organization and World Bank.

 

U.S. U.K.
Total GDP ($) 16.77 trillion 2.678 trillion
Population 318.9 million 64 million
GDP per capita ($) 53,041.98 41,787.47
Healthcare GDP (%) 17.10% 9.10%
Healthcare GDP ($) 2.86767 trillion 243.698 billion
Heathcare GDP per capita ($) 9070.18 3802.66

 

Table 1: Comparison between U.S. and U.K. of total GDP, population, GDP per capita, healthcare GDP percentage and amount, and healthcare GDP per capita.

 

The United State’s percentage of GDP used for health is the highest in the world. The statistics show that the U.S. health GDP is higher that the entire GDP of the U.K. and this can be said for every country except China, Japan and Germany. The Commonwealth Fund  ranks 11 countries – Australia, Canada, France, Germany, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States – in terms of quality, access, efficiency, equity and healthy lives. It ranked the U.S. worst overall and the U.K. was ranked best.

Based on the theory of supply and demand the higher costs could be accounted for because of a high demand of healthcare services, which would shift the demand curve to the right. It could also be accounted for if the supply is limited which would shift the supply curve to the left. Neither seem very persuasive because the general demand for healthcare is expected to be the same as any other developed country and less than that of third world countries, and the supply should be greater than most countries. So there must be something fundamentally wrong with the system. This is expected as there are excessive federal and state guidelines in the U.S., and because the singularity of healthcare as a good. Healthcare as a good is unique because of the uncertainty of the demand, meaning it often cannot be predicted, and the uncertainty on the supply side, because there are many treatments that can be chosen by the physician. It is also unique because it is inelastic, meaning a patient usually cannot choose to decline the good. Lastly, it is unique because the system has involved to use a third party payer to spread the risk of financial loss. These unique qualities make it hard to predict future costs.

The provider side of healthcare consists of physician fees, staff costs, administrative costs, and pharmaceutical costs.

It is a common thought that because physicians in the United States make a large salary that it is the reason for high costs in healthcare. In 2009, physician salaries accounted for 24.2% of the total spent on personal healthcare. A 2014 Insider Monkey study compared the salary of general practitioners and surgeons to the average per capita GDP. They then ranked them according to that ratio. The U.S. came in third for highest ratio while the U.K. came in sixth.

 

U.S. U.K.
Average Yearly Compensation (Specialists) $230,000 $150,000
Ratio of Compensation to per Capita GDP 5.7 4.9
Average Yearly Compensation (General) $161,000 $118,000
Ratio of Compensation to per Capita GDP 4.1 3.9

 

Table 2: Physician compensation and ratio to per capita GDP in the U.S. and U.K.

 

The comparison of the ratios between the U.S. and U.K. differ but if we compare the ratios of the ratios, to the ratio between the amounts spent on healthcare per capita it does not account for the difference. The ratio of the ratio of compensation per capita GDP for specialists is 1.16 and for general practitioners it is 1.05. The ratio of amounts spent on healthcare per capita is 2.385. It must also be considered that in 2011, there were 2.5 doctors per 1000 people in the U.S. and 2.8 doctors per 1000 people in the U.K..

There are many more people working in hospitals other than doctors and although their salaries are usually not as high they can still add up. According to 2012 OECD Health Statistics, 19.58 persons per 1000 were employed in a hospital and 21.22 in the U.K. (OECD.stat, 2015). It would be extensive to compare the salaries of every health profession so a suitable comparison is between nurses in their respective countries.  

 

U.S. U.K.
Average Yearly Compensation (Nurses) $54,184.00 $34,930.10
Ratio of Compensation to per Capita GDP 1.02 .8359

 

Table 3: Nurse compensation and ratio to per capita GDP in the U.S. and U.K.

 

When the the ratio of these ratios is calculated it is 1.22, higher than the comparison of physicians in the U.S. and U.K.. There is also a larger proportion of nurses in the U.S. than the U.K.. In 2012, there were 11.1 nurses per 1000 people in the U.S. and 8.21 in the U.K.. These would strengthen the case to reduce the pay of nurses before physicians if the case was to make the U.S. healthcare system emulate that of the healthcare system in the U.K.. Although doctor and staff pay is weighted towards the U.S. it is only by a slight amount and the fact that there are more healthcare professionals in the U.K. spread the weight.

Administrative costs are expenses incurred during the operating of a business. The more business being done, the larger the costs, but the costs should increase in proportion to the amount of business being done. Administrative costs account for 25% of health care spending in the U.S. and 16% in the U.K.. The study reported that countries where hospitals receive a lump sum budget require less administrative work than countries that engage in per patient billing. In countries like the U.S. with multiple payers the billing becomes even more complex requiring more time per patient and more costs. It also reported that in the U.S., hospital administration costs accounted for 1.43% of the GDP, in 2011.

The U.S. pharmaceutical industry accounts for 34% of the world market. This is because compared to other developed countries the U.S. provides fewer barriers to entry once FDA approval has been acquired. The market forces do not drive the pharmaceutical prices down as expected but on average a U.S. citizen pays 250% more than a U.K. citizen. In 2012, OECD Health Statistics reported that pharmaceutical spending per capita in the U.S. was the highest in developed countries at almost $1000. The U.K. came in at $380.90 per capita. To illustrate how extreme the prices are in the U.S., the International Federation of Health Plans did a study to compare common medicines in various countries.

There are serious discrepancies here and although it adds to the high costs in the U.S., pharmaceuticals only account for around ten percent of healthcare spending in both countries.

The concept of prepaid medical care can be traced back to the nineteenth century. The first health plans in the U.S., like the managed care we see today began, in the 1920’s. The ball really started rolling with the passage of the Health Maintenance Organization Act of 1973, which helped define prepaid group practice as it is today. Prepaid group practice is an arrangement through which a group contracts with a number of providers who agree to provide medical services to members of the group for a fixed payment. This is what is known as insurance, or the payer. The U.S. uses a multiple payer system in the hopes of using market forces to control costs. This is also the chosen route because of Americans distrust of the government in healthcare matters. In 1995, only seven percent of Americans expressed a “great deal of confidence” in federal health care agencies, compared with 19 percent of Canadians and 41 percent of Germans.

As explained above, healthcare as a good is unique and needs to be treated as such. A basic economic theory is that when there is more competition the prices will go down as the market power is in the hands of the consumer but the multiple payer system has not driven down costs of services and has increased administrative costs. The use of a third party payer is in itself a significant reason for the inefficiency in pricing. A market becomes competitive when the consumer can negotiate prices based on their willingness to pay for it and their ability to pay for them. When a subsidy is provided, the desire to negotiate prices is distorted. This results in a lack of desire on the provider’s part to seek out a more efficient method of production. Medical districts are a similar example that shows that competition does not reduce prices in healthcare but actually does the opposite. Various studies have shown that the hospitals in these medical districts do not compete to give the lowest prices but in how advanced the hospital can become. This creates a medical arms race with hospitals purchasing more and more advanced technology to make their hospitals more appealing. Even with this arms race, in 2012,  the U.K. had a hospital bed to population ratio of 2.81 while the U.S. had a 2.93 ratio.      

The U.K., on the other hand, began their socialized single payer National Health Service in July 1948, after World War II. The system is funded 98.8% by taxes and the other 1.2% is from patient charges, for things such as optical care, dental care and prescriptions. The taxes per individual vary depending on a variety of things, including wage, age and marital status but do not go higher than 12%, compared to the 17% of GDP per capita that goes to healthcare. The NHS tax system is first split into three tax brackets. Those three tax brackets are then further split into sixteen categories including, but not limited to, people under 21, married women and widowers and employees over state pension age. These taxes are able to remain consistent in the face of rising healthcare costs through cost saving measures that may seem unethical. The NHS uses a body called the National Institute for Health and Clinical Excellence (NICE) that decides which new drugs and treatments should be covered  by NHS. Although there have been very few  public complaints, they rarely approve a medication or treatment that costs $45,000 and only extends a person’s life by one year. This seems unethical regressive but every healthcare system needs a cost saving measure, and the citizens are given private healthcare insurance options (Harrell, 2009). Medical services, in the U.K., are free at the point of use and because there are few traditional insurance companies to run through, money is saved in administrative costs as is shown above. The single payer system has put the market power on the buyer’s side creating a monopsony. The U.K. government works as a buyer’s union for the people and thus has more control over the prices. In 2013, the U.K. government accounted for 86.6% of health expenditure and financing while the U.S. government accounted for 48.2%. The U.K. governmental expenditure on health care totaled to 7.3% of the country’s GDP while the U.S. governmental expenditure totaled to 7.9%. The U.S. government paid a larger proportion than U.K. yet has a lower quality.

The childbirth example can be used here as well, to compare the efficiency of the third party systems. A women giving birth in the same hospital as the duchess of Cambridge would most likely pay nothing as NHS services are free at the point of access. The average women in the U.S. would pay, on average, $11,670 for a vaginal delivery and $22,134 for a caesarean section.

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