medical tourism,global medical,health tourism,international healthcare,overseas healthcare,global healthcare
Articles, ChartsHome
Medical TourismFree Trade in HC
  Sizing All Causes Of High US Health Costs  

By Sandip Madan (Last updated, May 4, 2008)

The full circle below represents the annual healthcare expenses for an average American.  Compare it to the blue section of the circle at upper right.  That is the corresponding expense for an average first world citizen (like a European.)  The other sections of the circle show the wastes and the excess costs in the US (over and above those in other countries) that make US healthcare so expensive.  And what do we Americans get in return?  The table under the circle shows the answer - the same or worse care overall when we look at the standard metrics of quality.  The article below has more details.  


us vs oecd hc exp_043008.jpg

us vs oecd hc quality_043008.jpg


There’s a popular misconception about the fact that US healthcare costs far exceed those in any other country.  Partly fanned by health industry apologists is the belief that Americans somehow receive a lot more treatment or services (whether needed or unneeded) than people elsewhere.  In fact, the cost differential is mostly due to much higher US prices for the same services.  The reasons for this dysfunction and overpricing are distortions of supposedly cherished principles like free markets, private enterprise and “full” consumer protection.


For example, lawyers cite patient rights and full protection to thwart tort reforms.  This maintains the current litigious climate with its paralyzing inefficiencies.  Insurance companies espouse consumer choice and lobby against “big government” to prevent a single payer public system of universal healthcare.  Such a system would eliminate the staggering overlap, waste and bureaucracy created by thousands of disparate coverage plans.  Drug companies use “free market” prices to charge Americans twice as much as Canadians or Europeans pay, and use safety concerns to lobby against cheaper imports of the same drugs.  Finally, in the guise of “privatizing” a government function, a private body dominated by doctors is allowed to limit the supply of physicians so as to keep their salaries high.


The consequences are clear in comparing statistics from the official body of 30 developed countries, the Organization for Economic Cooperation and Development (OECD).(i)  The U.S. per capita healthcare expense of $6,401 in 2005 is over twice the OECD median of $2,922.  Yet Americans are at or below median OECD levels in health quality per standard indicators (see table).


An analysis of data drawn from a number of sources identifies seven factors primarily responsible for higher U.S. costs, along with their relative contributions.  As seen in the accompanying chart, the three largest are essentially forms of waste.  They are medical resource waste, administrative waste, and defensive medicine totaling $2,464 per capita - an amount approaching the entire medical cost per person in the OECD.


The largest of these factors, the waste of medical resources, is also the least visible.  It is mostly a productivity loss preventing hospitals, doctors and expensive equipment from treating more patients, increasing the cost per patient. For example, hospitals may schedule only six heart patients a day for nuclear stress tests using the same equipment and personnel that enables a cardiologist’s private clinic to examine 20.  Doctors see fewer patients because of the time spent between examinations to make lengthy annotations, recover dues, or perform other extraneous tasks.  These are consequences of a litigious climate, over-regulation and restrictive work procedures.  A smaller cause is some caregivers performing unnecessary tests and procedures only to profit themselves (as opposed to avoiding legal exposure through practice of “defensive medicine” as described below.)   This overall efficiency loss is about $973 per capita.(ii)


The extra administrative costs are primarily the result of a large number of insurers offering thousands of disparate plans, resulting in high overhead costs and expanded bureaucracy of payers and providers alike.  Bureaucracy is 31 percent of U.S. health costs compared to Canada’s 16.7 percent, according to an August 2003 report in the New England Journal of Medicine.(iii)  This imposes an added $915 per capita cost.


Defensive medicine is unnecessary tests and procedures conducted out of fear of lawsuits, rather than to benefit patients.  A May 1996 Stanford study put them at up to nine percent of costs(iv) or $576 per capita in 2005. 


Remarkably, the malpractice premium paid by U.S. caregivers is the smallest of the seven factors.  The Congressional Budget Office (CBO) estimates this to be just 1.5 percent of health expenses, or $97 per capita. 


While non-physician personnel have no significant wage differences, annual U.S. physician salaries averaged $199,000 in 1996 compared to a $70,300 OECD median.(v)  In 2005 terms, this disparity imposed an additional $375 in U.S. per capita costs.  In most countries, the government acts to keep physician supply above anticipated demand.  But in the U.S., it is the doctor comprised private bodies like the American Medical Association (AMA), the Accreditation Council for Graduate Medical Education (ACGME) and the Residency Review Committees (RRC) that control the physician pipeline.  To benefit their profession by keeping salaries high they have an adverse incentive to maintain supply well below demand levels.(vi)  The OECD has a median of 3.3 physicians per 1000 people, while the U.S. has only 2.4.  More U.S. physicians choosing to work fewer hours exacerbate this relative shortage, as do their extra administrative tasks that further reduce face time with patients.


Over-priced drugs cost Americans $317 per capita more than the OECD median.(vii)  Critics decry what they call drug industry greed, wastefulness and price gouging, while the drug companies defend the current U.S. monopoly pricing as being part of the free market system that makes the industry viable.


The last factor is treatments that reduce disabilities and improve patient comfort and productivity, even if they do not prolong life.  The U.S. has more of these because of de facto rationing through long waiting periods in other countries.  This is the only part where Americans are getting a significant benefit in exchange for their higher healthcare payout.  But based on OECD and U.S. Healthcare Utilization Project data, these differential U.S. costs are only about $225 per capita or 3.5% of the total.(viii)


Understanding these higher cost contributors is a diagnostic first step.  The moves for reform are gaining momentum as the health burden worsens.  Remedies face political rather than administrative hurdles.  The extent to which these are overcome will determine the well being of U.S. patients, not just of the legal and healthcare industry.

 [i] OECD healthcare data, October 22, 2007 edition.  Available online at under health statistics.


 [ii] This is the amount calculated after accounting for all the other factors.


[iii] See the New England Journal of Medicine, “Costs of Healthcare Administration in the United States and Canada,” August 21, 2003, by Steffie Woolhandler, et al.  The Canadian system is similar to that of other OECD countries with higher shares of public health spending.  In the absence of OECD median data, Canadian administrative costs are compared with U.S. costs, with the 14.3 percent difference applied to the 2005 figures.


[iv] Joint Economic Committee, U.S. Congress study, “Liability for Medical Malpractice: Issues and Evidence,” May 2003, p. 13.  See also Daniel P. Kessler and Mark McClellan, “Do Doctors Practice Defensive Medicine,” National Bureau of Economic Analysis Working Paper, 5466, February 1996.  Also quoted in the Quarterly Journal of Economics, May 1996.  The study estimated defensive medicine costs to be between five and nine percent of the total.  This appears to be overly conservative, so the upper end of this range is taken.  For context, defensive medicine accounts for 25 percent of the total U.S. health bill, according to J.W. Smith, “World’s Wasted Wealth II” 1994, Section 5, published by The Institute for Economic Democracy. 


[v] These physician salary differences are quoted in Health Affairs, May-June 2002, p. 175, “Cross-National Comparisons of Health Systems Using OECD Data, 1999” by Uwe E. Reinhardt, et al.  Active U.S. Physicians numbered 902,100 and the total U.S. healthcare expense was $1,988B according to the U.S. Census, Statistical Abstract of 2007.  This works out to an excess physician salary of 6% of healthcare expense in 2005, and assuming the same salary differential in dollars as in 1996, to $375 per capita in 2005.


[vi] University of Pennsylvania and NBER paper, “Barriers to Entering Medical Specialties,” March 2003, p. 14-15, by Sean Nicholson.


[vii] OECD healthcare data, Oct. 12, 2005 edition, for 2003.


[viii] OECD data lists the most common major treatments where the U.S. incidence is compared with the OECD median.  The US numbers are significantly higher for eight procedures, namely, heart bypass, angioplasty, angiography, knee replacement, hip replacement, C-Section, pacemaker and hysterectomy.  Procedure costs are derived from U.S. Healthcare Utilization Project (HCUP) survey of charges, adjusted for negotiated discount rates and medical resource waste factors.  The total cost is further increased by 30% to account for possible quality of life and diagnostic procedures like breast reconstruction, MRIs and CAT scans for which OECD comparison is unavailable.


Back to Articles, Healthcare Cost Charts


Healthcare Cost Charts | Home Page | Per Capita Healthcare Expense | Cost of Heart By-pass Surgery | Healthcare Expenses as Percent of GDP | Hospital Costs per Day | US Medical Tourism - Scope And Protectionist Fallacies | We Need Free Trade In Healthcare (Full Article)

Starfield Technologies, Inc.