Why Does The U.S. Pay More for Health Services

Ewi Reinhardt, a very good health economist, has a couple of articles (Part I and Part II) on why health care costs are so high in the United States, compared to other countries. The graph below is from the first of the two articles, with my added red line. The regression line (in black) is used to estimate an "expected" per capita expenditure on health as a function of PPP per capita GDP. While it seems reasonably close to the observed for most countries, there is a large "excess spending" on health, as measured by the difference between the expected and the actual expenditures.

In the second article he attributes a significant part of the excess to the high cost of administration of our health services, created by our substitution of commercial health insurance for the public medical services offered in most countries.

Note however, that the administrative costs represent only part of the difference. The United States also has had an inflation of input costs for health services, uses more expensive technology in the delivery of many health services, and there is a cost of the "defensive" health services made inevitable by our tort system.

I think his conclusions must be right. One point that should be made is that although we spend more per capita on health services, we do not have better life expectancy or health status than other developed nations. One can infer from the articles that we could cut costs without cutting the quantity and quality of health services by better organization of our health and medical institutions.

I would make a quibble, however. The linear regression line is more likely to be accurate in predicting expenditures for countries that fall in the middle of the range, and less likely for outliers, and the United States is the obvious outlier. If the willingness to spend money on health services varies non-linearly with income, then some curve such as that shown in red might better predict "the expected per capita expenditure".