Policy So Big It’s Steppin On Leprechauns

(title inspiration)

Everyone is talking about health care reform these days, and indeed things around here are no different. As this issue will no doubt become one of the largest President Obama will face, if not define his Presidency, I figured it might be worth spending some time investigating.

In addition, most if not all of you are already aware that clearly a doctor I am not. But part of what I actually do on a day to day basis is to analyze complex situations, read the relevant industry guidance, and then provide a best course of action based upon my professional judgment. But since the economy still stinks and business hasn’t picked up in recent months within the Private Equity space (dbag-speak for industry), I’ve had to hone my analytical skills elsewhere. So with that, I bring you the following analysis which I hope is at least as spin-free as the “No Spin Zone”:


6 Reasons Why U.S. Health Care Is So Expensive

(Read the full article for a more in-depth analysis. It truly is worth your time

1. GDP Per Capita

It should come as no surprise that “ability to pay” is a large contributor to cross-national variation in health spending. Indeed 90% of the variation between countries can be explained by this factor, except for within the United States:

[The] relationship between GDP per capita and health spending predicts a U.S. per capita health spending level of $3,435 for 2001. The actual level, $4,887, is $1,452 or 42 percent higher than the predicted level.

2. Distribution of Market Power and Prices

Americans pay higher prices for the same services than citizens in other countries, which is partly explained by the fact that professionals in the US are paid much more than their foreign counterparts (free education and a less punitive legal environment abroad are among the culprits here).

Another contributing factor is the fragmented way in which healthcare costs are financed, which allocates greater market power on the supply side of the equation. Other countries have balanced the playing field by introducing monopsonistic (i.e. single-payer aka Canada) or by allowing multipayer systems to bargain collectively with healthcare providers, which can be within government-set healthcare budgets (Germany).


3. The Capacity of Health Systems

Other countries have higher physician and nurse-to-population ratios, and the United States is also in the bottom quartile of hospital beds per capita. The paper indicates that part of this is due to the constraints on medical school capacity which has remained relatively flat over the past 30 years.


4. Administrative Complexity and Costs

By international comparisons the US approach to healthcare financing is extremely complex. A sizable fraction of increase in US healthcare spending (not explained by higher GDP) is attributable to the higher administrative overhead required by such a complex system.

One study quoted therein finds that in 1999 > $293b (or 1/4 of total spending) was related to administrative costs for insurers, employers, and providers of health care, and that private insurers admin costs are 2.5 x’s as high as public programs.

I will concede however that this issue is ripe for debate.

5. Unwillingness to Ration Health Care

According to the report, healthcare R&D gives society the option of purchasing additional “quality-adjusted life years” (QALY’s) at increasingly higher prices. See below:



Modern cost-effectiveness research is aimed at identifying the proper shape of this curve as well as answering 2 morally troublesome questions:

• How far up the QALY supply curve should the health system go to procure added QALY’s?
• Should the maximum price paid for added QALY’s be uniformly applied to all or be allowed to vary with the individual’s ability to pay?

Britain’s system uses a cutoff price of $53,000 per QALY beyond which treatments are not publicly funded, however patients with discretionary funds or supplemental insurance are allowed to purchase more costly treatments from the private health sector. Other countries do not set a maximum rate (due to political realities), and therefore rely on setting the limit implicitly through a mixture of price controls and limits on capacity.

In the US neither private nor publicly funded programs appear to observe any explicit guideline on the maximum price per QALY. Two exceptions are private health insurance policies that have lifetime upper limits and Medicare with lacks catastrophic benefits.

6. Pharmaceutical Prices

Some US officials accuse foreign governments (namely those with a higher concentration of demand side bargaining power) of keeping drug prices artificially low, which has resulted in US patients now funding the bulk of pharmaceutical R&D. This concern is now even expressed in US trade negotiations.

However recent studies have shown that comparing drug prices on a PPP (purchasing-power parity) basis rather than at current exchange rates proves that US-foreign price differentials are in line with income differentials.

The paper then raises two questions:

• How exactly would this bargain translate into lower prices for US patients rather than simply more profits for US drug companies?
• How much of the added revenue would actually flow through to increased R&D?
  

And just to further illustrate that point, in 2002 the 13 largest drug companies allocated revenue as follows:

• 25.3% Cost of Goods Sold
  
• 32.8% Selling, General, and Administrative Expenses
  
• 14% R&D
• 7.3 Taxes
• 20.6% After-tax Profit