Issue No. 4: Surprising Revelations in a Deep Dive on Health Costs

Policy Makers Should Pay Attention to a New JAMA Investigation That Finds Where the Money Goes and Why

When it comes to health care costs, there is not the slightest doubt about the most important question:

Why is it that the United States spends so much?

The U.S. spends more than one-sixth of its GDP on health care. No other country is even close. According to the latest figures from the OECD, among the world’s 34 most industrialized nations, the U.S. led by spending 16.9% of its economic output on health. Second was Switzerland at 11.5%; third was Japan at 11.2%. In fact, most countries similar to the U.S., such as Australia, France, Germany, the U.K., and Canada, are tightly grouped, spending around 10% or 11%. The United States is the outlier – by a mile. 

But, when you consider what those countries are spending on social services, including elderly and family care and health care, the differences aren’t as stark. The U.S. spends around 19% of GDP on social services, where other developed countries spend closer to 30%. So when you add up healthcare plus social services, most developed countries are spending around 35% to 40% of GDP on the two combined, the U.S. is spending more on health and less on social services.  

Unfortunately, too many discussions of U.S. health spending are distorted by focusing only on one particular aspect of spending. Lately, for instance, we hear criticism of the cost of particular medicines. But an investigation published on Dec. 27 by JAMA looked closely at where the money is being spent. The report makes the critical point that, despite the size of the spending, “little is known” about its make-up. The JAMA study tries to change that. “It is important we have a complete landscape when thinking about ways to make the health care system more efficient,” said its chief investigator, Joseph Dieleman of the University of Washington.

A Picture of Spending That Is Complex and Subtle

The study paints a picture of health spending that is complex and subtle. As Ken Thorpe, a professor of health policy at Emory University, said in an interview with the Washington Post:
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“Data like this continues to draw attention to the fact that a lot of these proposals being discussed about controlling health-care costs really don’t address the underlying issue, which is rising disease prevalence. You see this rise in chronic disease spending. Much of it is potentially preventable.”

What Thorpe is saying is that Americans are sicker than people in other countries. That is a major reason we spend more on getting people well. A 2015 Commonwealth Fund study, for example, looked at 13 rich OECD countries and found that Americans had by far the highest proportion of seniors with two or more chronic diseases: 68%, compared with 33% for the U.K. and 49% for Germany. We also have the highest obesity rate – 20% above the OECD average. 

But back to the JAMA research itself: The study found that diabetes had the highest health care spending in 2013 (the most recent year), at $101.4 billion. Ischemic heart disease (heart attack and stroke) was second, at $88.1 billion, with lower back and neck pain a close third at $87.6 billion. Those three diseases alone account for more than was spent on all diseases in the United Kingdom.

Expensive Diseases Are Also Preventable Diseases

If we want to reduce health care spending in the United States, we will have to focus on the diseases that are consuming the most dollars – especially when those diseases can be prevented or mitigated by changes in the way we live. We can reduce the occurrence and severity of all three of these diseases through diet, exercise, and smoking cessation. 

The study includes a table of spending by public-health authorities on the top 20 conditions. Lower-back and neck pain received just $140 million (or a few tenths of a percent of the total costs incurred), smoking $340 million, and heart disease does not even show up among the top 20. 

European and other OECD countries put emphasis on the kind of social spending that can reduce health costs considerably. One example is spending on “incapacity” – that is, disability cash benefits, including day care, home-help, and rehabilitation services. The U.S. spends 1.4% of GDP on incapacity, while the OECD average is one-third higher, at 2.1%. The Nordic countries spend 4%. Services that help a disabled person recover can reduce the time the patient is sick, racking up large inpatient and nursing-home costs.

Other OECD countries also have higher rates of spending on family benefits, such cash allowances for having children, subsidies for childcare, and public support for parental leave – all of which can reduce health care spending. The U.S. spends just 0.7% of GDP on family benefits, compared with an OECD average of 2.1%. The U.K. spends 3.8%; Australia, 2.8%; Ireland, 3.3%. Again, in the U.S., the health care system ends up being burdened with costs that could be reduced by grater investment in social services.

Then, there is the matter of compliance. Spending on diabetes, especially, rises sharply when it is left untreated by pharmaceuticals and instead leads to hospital care.

As we pointed out in our last newsletter, a 2005 study by Michael Sokol and his colleagues examined 137,000 patients with health insurance and found, “For diabetes and hypercholesterolemia, a high level of medication adherence was associated with lower disease-related medical costs. For these conditions, higher medication costs were more than offset by medical cost reductions, producing a net reduction in overall healthcare costs.”

Drivers of Costs Vary Considerably

A major reason for policy makers to focus on lifestyle issues and adherence is that it is so hard to draw simple conclusions from such a complicated health care system. 

The JAMA study, as the Washington Post noted, found that “the primary drivers of health-care spending vary considerably.” For instance, while pharmaceuticals were responsible for about half of spending on diabetes, they were involved in just 4% of spending on lower-back and neck pain and were minimal costs for most neurological disorders and roughly zero for treatment of falls, which are the fifth-leading cause of health spending. For ischemic heart disease, pharmaceuticals represented only one-eighth of total spending; the costs of treating hypertension and high cholesterol have declined over the past decade. 

A particularly dramatic chart, on page 2642, shows spending on five different categories of care. By far the highest spending is for inpatient or ambulatory (outpatient) care, with each at about the same level for 2013: around $700 billion. Prescribed retail pharmaceutical costs come in third, at about $300 billion, followed by nursing facilities at about $200 billion and emergency-room care at about $100 billion. 

While medicines seem to get most of the attention in discussions of cost these days, they represent only about 10% of spending (when counting the physician administered drugs this grows to 13%), according to the JAMA chart.

Pharmaceuticals a Low Proportion of Total Health Spending in US vs. OECD

And we should also note that, in the latest OECD report, the U.S. ranks far below average in the proportion of total health care spending that is devoted to pharmaceuticals: 13% compared with an OECD average of 20%. In fact, only 4 of the 27 countries surveyed devote a lower share of their health dollars to prescription drugs than we do. This low proportion in the U.S. could be counter-productive. As we have pointed out in previous newsletters, drugs keep patients out of hospitals and doctors’ offices, where the largest share of spending occurs.  

Also dramatic is a chart in the JAMA study (on page 2639) showing how much costs increase as Americans grow older and how those costs differ for men and women. The single largest spending cohort is women older than 85, where spending exceeds $100 billion. For men, spending in that cohort is less than half that for women – mainly because men die younger. Spending per person, the study finds, is greater for men than for women for ages 65 to 74 and for younger than 15 years. Otherwise, spending on women is greater.