Ken PerezWhile on a recent vacation in Cabo San Lucas, Mexico, with my family, I got a chance to read The Coming Jobs War by Jim Clifton, the chairman of Gallup, the global research organization. In the book’s chapter on health care, Clifton observes, “Congress has passed legislation on healthcare regarding how it is paid for not how to lower costs.” Clifton continues, “The current administration and Congress are working on how to fund the problem, not how to solve it.”

Clifton’s observations reminded me of two fundamental issues in the ongoing discussion about the cost of health care in the United States.

First, the cost savings that are bandied about on Capitol Hill usually pertain only to federal spending and rarely address the much broader issue of total societal spending on health care. This is an important point, because federal spending on health care, at about $800 billion this year, will account for less than 30 percent of the $2.8 trillion our nation will spend in total on health care in 2013. 

Second, with regard to solving the cost problem, at its most basic level, the aggregate annual cost of health care is the product of price times quantity for all the healthcare services utilized over the course of a year. The United States spends two to three times as much as any other developed country on health care, so our prices and/or quantities must be higher. Over the past 20 years, the Dartmouth Atlas of Health Care has brought to light significant disparities in healthcare spending across our nation. But even more fundamentally, as Ezra Klein pointed out in The Washington Post on March 2, 2012, “There is a simple reason health care in the United States costs more than it does anywhere else: The prices are higher.” 

Now you may be thinking, “It’s much more complicated than that”—and obviously, it is. But in his article, Klein compellingly cited a report issued by the International Federation of Health Plans (IFHP), a global insurance trade association that includes more than 100 insurers in 25 countries. Klein writes: “[IFHP] surveyed its members on the prices paid for 23 medical services and products in different countries, asking after everything from a routine doctor’s visit to a dose of Lipitor to coronary bypass surgery. And in 22 of 23 cases, Americans are paying higher prices than residents of other developed countries. Usually, we’re paying quite a bit more.” 

Furthermore, two months later, The Commonwealth Fund issued an analysis of data from the Organization for Economic Cooperation and Development (OECD) and other sources to compare healthcare spending across 13 industrialized countries. The study concluded that the United States has below-average utilization of physicians and hospital beds, but higher prices for a variety of healthcare services and products. Although hospital stays are shorter in the United States than the OECD median, after adjustment for differences in cost of living, on a per-discharge basis, they are almost three times as expensive as the OECD median. Overall prices in the United States for the 30 most commonly prescribed drugs are almost double the average of eight other OECD countries. After adjustment for differences in cost of living, American primary care physicians make over 50 percent more than the average primary care physician across five other OECD nations, while orthopedic physicians in the United States make more than double the average in those same five countries. 

In September 2012, the Institute of Medicine issued a 381-page report that concluded that about 30 percent of what is spent on health care—$750 billion out of a total spend of $2.6 trillion in 2010—is waste, of which $210 billion is due to the provision of unnecessary services and $105 billion is due to prices that are too high. 

Although we obviously should continue to prevent overutilization of services, let’s not fail to also scrutinize the pricing element of the healthcare cost equation as we look at this important issue through a societal lens.  

Ken Perez is senior vice president and director of Healthcare Policy, MedeAnalytics, Inc., Emeryville, Calif.

Publication Date: Tuesday, July 02, 2013