Monday, July 11, 2011

Charts of the Day

Everyone concedes that the United States has the highest healthcare spending per capita. Healthcare reform zealot Ezra Klein of the Washington Post advocates less private sector and more government and reprinted an OECD chart:

source: WaPo via OECD dataset

Klein's off-base for two reasons. First, there's disagreement about whether higher spending on healthcare is per se undesirable. Being more wealthy, Americans logically could choose a greater investment in health--including advanced diagnostic technology.

Second, the solution isn't necessarily more government. Rather, as I have argued, the growth in healthcare spending is driven by the decreasing share consumers actually pay for treatment. Simply put, free goods are over-used, vitiating most incentives for cost control.

Conn Carroll of the Washington Examiner agrees:
The U.S. health care system is terrible at controlling costs. But it has nothing to do with any phony distinction between "public" and "private" health care spending. It has everything to do with how U.S. government policy protects American health care consumers from out of pocket health care spending.

Consider employer-funded health insurance tax preferences. Tax policy incentivizes employers to compensate their employees, not through cash, but through generous first-dollar coverage health insurance plans. Because the owners of these policies do not have to pay anything out of pocket for most of the care they receive, they have been anesthetized to most health care costs. Meanwhile, doctors have every incentive to push for more treatments at higher costs. So, all thanks to public policy, none of the parties that actually make most private sector health care decisions (neither the doctors providing the care nor the patients receiving it) have any incentive to keep costs low. But this is all labeled "private" spending. The dollars go from the employer, to the health insurance company, to the doctor. No money ever touches government hands so it is not "public" spending.

There are better measures. The OECD also keeps data on out of pocket health care spending by country. Turns out, American health care consumers, as a percentage of total health care spending, pay far less out of pocket than most other OECD countries do. In 2009, U.S. consumers paid less out of pocket, 12.3 percent, than all but three other OECD countries (France, United Kingdom, and Luxemborg). Not surprisingly, France also spends more on health care as a percentage of GDP than all but two OECD countries (the U.S. and the Netherlands). Correlation does not equal causation, but as the graph below shows, generally, the higher percentage a country’s consumers pay for their own health care, the less that country spends on health care as a percentage of GDP:

source: Washington Examiner via OECD dataset
I've looked at the full database, and concede that the correlation isn't overwhelming across countries. But I support Carroll's conclusion:
Reducing third-party payments is the key to lower health care costs. As Arnold Kling wrote last year:
You can have the government tell people what they can and cannot have. Or you can have individuals pay for a larger fraction of the medical procedures that they consume. It really comes down to those choices.

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