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Viewpoints: Why is spending on health care so high?

Published: Saturday, Feb. 1, 2014 - 12:00 am

Turn on the news on any given day, and you’ll hear a report about health care spending in the United States. The numbers are jarring. We spend more than 17 percent of GDP on health care. By contrast, Germany spends about 11 percent, England less than 10 percent. Per capita health care costs in the United States are more than twice the average of other developed nations, yet we don’t have better health outcomes.

Pundits offer various reasons for why spending is out of control. The list is extensive, and explanations range from the fee-for-service reimbursement model to costly end-of-life care to unhealthy lifestyle choices.

Others cite patients for seeking unnecessary specialty care because a third-party payer, usually an insurance company, covers the costs. Many experts also point out that hospitals in the United States charge higher prices than those in other countries for the same procedure.

High costs likely stem from these reasons and more. However, there may be a benefit from all our spending. More specifically, U.S. spending serves as a subsidy for global health care research and development.

The subsidy arises from an inefficiency in the U.S. system. Much of the growth in health care costs is a function of spending on technology – encompassing drugs, devices, procedures, etc. Unlike other countries, the United States rarely evaluates cost-effectiveness in the adoption of new, unproven technologies. As long as the technology does not harm patients, insurers are willing to give it a shot.

The same cannot be said for European systems. Many countries have centralized agencies that conduct “health technology assessments” to determine whether a technology is cost-effective. In Britain, the National Institute for Health and Care Excellence evaluates value, while the German Institute of Medical Documentation and Information provides similar services in Germany.

The result? The United States ends up spending large sums of money on technologies that provide little to no benefit. In recent years, some medical devices, diagnostic tools and robotic surgeries have come under fire as examples of wasteful spending.

There are two ways in which this spending benefits other countries. First, the fact that U.S. insurers are willing to pay high costs allows technology manufacturers to charge lower prices in other countries.

Pharmaceuticals provide a useful example of this principle. The Commonwealth Fund notes that many developed countries demand that drugs provide adequate value for their cost. As a result, drug companies reduce their profit margins and charge lower prices so that the drug will meet cost-effectiveness criteria.

U.S. insurers, on the other hand, are often willing to pay exorbitant prices even if a drug is only marginally beneficial. Drug companies, therefore, charge higher prices – a 2012 study found that U.S. insurers paid about 400 percent more for statins than those in Great Britain. Profits from sales in the United States can then fund subsequent R&D.

Second, the willingness to try new technologies in the United States allows technology makers to use the U.S. market as a testing ground. A recent study from researchers at Dartmouth and Harvard observes that new treatments have varying levels of cost-effectiveness. Yet once they are in use, some technologies progress rapidly.

Consider the example of genome sequencing. The Human Genome Project required $3 billion to sequence the human genome, while private companies simultaneously sequenced a genome for hundreds of millions. A little over a decade later, sequencing a genome costs $5,000 to $10,000. Granted, this is an imperfect example, but the takeaway is that some technologies see costs fall quickly.

At the same time, some innovations do not become cheaper. Either way, new technologies receive a tryout in the United States. Some follow a Moore’s law-like progression and the costs come down, while others fail to do so. The U.S. health care system funds this tryout. Other countries are then able to cherry pick and use the successful technologies once they become cost-effective.

Moving forward, the United States must strike a balance between maintaining its role as a leader in health care R&D and reducing unsustainable growth in health care costs. This may require innovative approaches to health technology assessment or entering partnerships with other countries to test new technologies. For instance, the United States might consider amending trade agreements to ensure high-income countries share the burden for technologies developed here. Regardless, there is reason to believe that our health care spending is doing more than we see at first glance.

Akhilesh Pathipati is a Stanford medical student and Harvard graduate who has worked on health initiatives in Massachusetts and California. He is a Sacramento native.

Read more articles by Akhilesh Pathipati

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