In The Myth of Massive Health Care Waste, Arnold Kling rounds up “the usual suspects” for high health care spending (in the US):
- spending in the last year of life
- drug company profits and advertising
- administrative overhead
The first point seemed perfectly plausible to me, but it’s not a large effect:
An urban legend has it that close to half of all health care spending comes in the last year of life. The facts are somewhat different. The most thorough study, by Donald Hoover, et al, finds that 27 percent of Medicare spending takes place during the last year of life.Overall, 22 percent of health care spending on people over 65 takes place in the last year of life. However, only 1/3 of U.S. health care spending is for people 65 and older. Thus, as a percentage of overall U.S. health care spending, spending on the last year of life amounts to about 7 percent. That is high, but not staggering.
Big Pharma isn’t to blame either:
Another usual suspect is the evil pharmaceutical industry. However, total profits of pharmaceutical companies are about one-half of one percent of GDP. In the short run, stringent price regulation could reduce health care spending by perhaps one or two tenths of one percent of GDP. The long run effects of reducing the incentive to develop pharmaceuticals could be adverse, because pharmaceuticals often substitute for more expensive therapies.
An economist’s point of view on why Canadian health care spends less on administration:
In a fee-for-service system as in the United States, physicians have an incentive to spend their time doing procedures. They will want to off-load as much paperwork as possible to clerical staff. In a different health care system, where physicians are paid something more like a flat salary, two factors are at play. One is that there is less paperwork, which is good. The other factor, however, is that physicians have less incentive to offload paperwork, because spending time doing administrative work themselves will not lower their incomes. More administrative workers could be a symptom of more paperwork, or a more efficient system for handling paperwork, or both.
The real culprits, according to Kling, are physician compensation and the utilization of high-tech procedures, both of which are higher in the US than elsewhere — and both of which likely bring benefits, not just costs.