Health Care Spending: What Does Science Tell Us?

By Brittany Nielsen, MPH| March 1, 2017
Program Manager, Sutter Health

The future of health care in America looks uncertain. There is an abundance of opinions on the left and right about what our nation needs to do. However, before we can move forward effectively, it’s important to understand what science has to tell us on the topic.

Republicans in Congress, along with President Trump, are calling for the immediate repeal of the Affordable Care Act (ACA). One concern about the ACA has been its soaring premiums, increasing by as much as 22% this year. In fact, premiums across all health insurance users have increased, in part because previously uninsured individuals, some with expensive-to-treat chronic conditions, have joined the pool of customers.

However, it is estimated that repeal of the ACA without an immediate replacement will result in a loss of insurance for as many as 30 million Americans. There are also questions about whether to continue popular features of the ACA, such as extending coverage under a parent’s plan to adult children up to age 26, or expanding preventive and reproductive health coverage.

Understanding Health Care Spending in America

Health care spending in the United States is unlike anywhere else in the world. The costs are monumental on a scale that is hard to fully comprehend. At nearly 18% of the country’s GDP, the U.S. in 2015 spent at rates more than double those of similarly developed countries. To put this in context, U.S. military spending accounted for 3.3% of the GDP that year.

Here’s another way to think about it. Walmart generates the highest revenue of all companies in the world. At $482 billion annually, Walmart would still have to increase global revenue by 664% to cover the $3.2 trillion dollars spent annually on health care in the United States.

Understanding Health Outcomes in America

Health care costs and outcomes can be compared using data from the Organisation for Economic Co-operation and Development (OECD). With 35 participating countries, OECD provides a basis for economic comparisons between the U.S. and other high income economies. In outcomes typically indicative of general health, the United States scores in the bottom percentiles. For example, the life expectancy at birth for Americans (78.8 years) is on par with residents of Turkey, Chile and Costa Rica. Americans live four years less, on average, than counterparts in Italy, Switzerland, Spain and Japan.

The U.S. has an infant mortality rate of seven per 1,000 live births, which ranks in the bottom third—a group which includes India, South Africa, Mexico and Russia.

This pattern is repeated across many health indicators. Americans are sicker, their quality of life lower, and their lifespans shorter, all at a higher cost. In the United States, health care spending is more than $9,000 annually per capita. Japan, the country with the longest lifespan, spends a mere $4,152 per capita.

There’s More to the Story

The ACA does not tell the whole story of health care spending in America. The Kaiser Family Foundation, which tracks increases in health care spending in America, predicts an average of five percent growth annually through 2025. Historically, the biggest spikes in health care spending were seen in the 70s, 80s, and early 2000s, long before talk of the ACA.

Annual growths in health care spending have been decreasing since a high of 12.1% in the 70s, to an average of 6.6% during the George W. Bush Administration, and an average of 3.9% during the Obama Administration. Even with these drops, the reality remains that health care in America is expensive.

Understanding Health Determinants in America

With health care spending at an all time high, it’s natural to expect better health outcomes to follow. This hasn’t happened. Theories as to why this is so vary, and I suspect each contributes some piece of the answer to this very complicated question. The overarching truth is that our country has hit a point of diminishing returns for health care. Despite increases in investment, there is little to no improvement.

There are two fundamental misalignments in the United States health care system that drive radically high health care rates with exceptionally low returns.

1. Health Outcomes vs. Health Spending

Findings from multiple research institutions (see here and here, for example) indicate that access to medical care accounts for 10% of an individual’s health outcomes across their lifetime. An additional 20% is subject to genetics. The remaining 70%—by far the largest portion of any person’s health outcomes—can be attributed to behavior and environment.

Simply put, health outcomes are not aligned with health spending. Still, in the U.S., 88-98% of all health-related spending goes toward medical services.

This leaves virtually no spending capacity on the determinants that drive 70% of health outcomes. This includes a lack of spending on public health services, education, environmental safety, parks and recreation, and so on.

2. Goals vs. Incentives in Health Care

The entire U.S. health care system is volume driven. Hospitals and physicians generate revenue on a fee for service basis. This means physicians generate more payment the more times they see a patient, the more procedures they do, and the more tests they order. While Americans would certainly like to believe that their physicians have nothing but a patient’s best interests in mind, incentives are powerful conscious and subconscious drivers of behavior.

When Blue Cross Blue Shield of Massachusetts changed to a capitated payment model rather than fee for service, they saw a 10% decrease in spending by the fourth year. Additionally, improvements to the quality of care were seen in as little as a year.

A capitated payment system means that physicians and hospitals are paid a per-member-per-month amount or a risk-adjusted sum amount to manage a certain population annually. It is then up to the medical group to manage that patient population within that budget. Savings (e.g., coming in under budget) are often shared with the medical group, as are the risk of overages.

Under this model, physicians are incentivized to keep patients healthy and only to order necessary tests and procedures. While some may worry that this system would lead to poorer care by physicians in order to cut costs, quality metrics and standards are built into the physician reimbursement system to protect against this. These metrics aided in the improved quality outcomes observed in Massachusetts.

What Can We Learn From Around the World

Health care is easily one of the most polarizing and politicized topics in the United States. However, when political jargon is taken away, examples of what works can be seen across the world. Ultimately each country must find a system that works within their social, political and financial structures. Still, there are lessons our own unique nation can learn from others.

In Japan, for example, patients pay for 10-30% of their health care costs, while the government pays the remaining amount. The price of all supplies, tests and services is set by the government. The government keeps reimbursement aligned with actual costs and eliminates unnecessary geographic variation. (In California, on the other hand, the same MRI imaging study can cost anywhere from a few hundred dollars to over $6,000.)

There are only eight insurers in Japan, which keeps administrative costs low. An emphasis on preventive care is also a large driver in Japan’s exceptional health outcomes. As mentioned previously, the life expectancy at birth in Japan is 83.7 years with an annual per capita health care spend of $4,150.

To the north, Canadians reduce their health care costs by turning payer management over to the individual provinces rather than private insurers. Administrative costs account for 25% of U.S. health care spending while it accounts for only 12% of health care expenditures in Canada. Standards are set federally, patients are excused from the claims process, and the system is funded through taxes. The life expectancy at birth in Canada is 81.2 years with a per capita health care spend of $4,608.

Germany is home to a multi-payer universal system. All citizens must enroll with the equivalent of 15.5% of their salary going toward health care. Of this, 7.3% is covered by the employer and 8.2% is covered by the employee. The life expectancy at birth in Germany is 81.2 years with a per capita health care spend of $5,267.

Remember, the life expectancy at birth in America is 78.8 years with a per capita health care spend of $9,451 for the same year as the data taken from the above three countries. The latest numbers actually show the United States spending at nearly $10,000 per capita annually.

What’s Right for the U.S.?

I expect there will always be political and moral debate in the United States as to whether health care should be a universal right or a free market good. However, one fact remains. When health care is a universal and federally regulated right, everyone saves money and everyone’s health improves.

Not only has the United States fallen behind in the way it delivers health care, but it has done so in a way that is potentially catastrophic to the economy. Reform, free of political squabbling and ideation, is more important now than ever. A repeal of the ACA does not address the radical spending and misalignment in the American Health Care System, but it does put millions of lives at risk and will only continue the increase in costs being handed down to the average American. 

 

Brittany Nielsen, MPH, is the program manager for Sutter Care at Home’s Flu Prevention and Wellness Program and has long been a passionate advocate about social determinants of health. She was part of ETR’s first team of Kirby Summer Interns in 2014 and has assisted ETR in the past developing grant proposals. She can be reached at bnielsen2@gmail.com.