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Is U.S. Health Spending on Another Planet?

Monday, February 13, 2012

While the United States consumes a disproportionate share of global resources devoted to medical care, this global share is shrinking.

The Occupy Wall Street protests have sparked the observation that those earning more than $34,000 per year fall in the top 1 percent of global income. The advantages of being born in America are extraordinary by any measure. But the global distribution of health expenditures is tilted much more in the direction of the United States than the distribution of income (figure 1.7a).

From a global perspective, the U.S. health system is massive, accounting for more than one-third of an estimated $6.4 trillion in health expenditures across the world in 2009. This share is far higher than the U.S. share of worldwide gross national income (GNI), a sharp contrast to the rest of the G7 nations (Japan, Germany, UK, France, Italy, and Canada), where the shares are almost equal. As one critic recently noted, U.S. health spending amounts to the fifth-largest economy in the world, roughly comparable in size to the entire economy of France.

The figures pictured are based on estimates by the World Health Organization (WHO). In most countries, GNI is approximately equivalent to GDP, so it is a reasonable approximation of national output. However, to equalize purchasing power, the WHO estimates health spending using the rough equivalent of GDP purchasing-power-parity (PPP). Conceptually, PPP represents how many units of a foreign currency would be equivalent to a U.S. dollar in terms of its ability to purchase an identical market basket of goods in the two countries.

Conover Figure 1.7a JPEG

This approach tends to overstate relative U.S. health spending because it is based on general U.S. prices (which are about 5 percent lower than in the industrialized countries of the OECD) rather than on U.S. health prices, which are about 25 percent higher than in the OECD. That is, in the United States $95 can buy what it would cost $100 to buy in the average OECD country, but it would require $125 to buy a typical bundle of medical services that cost $100 in the average OECD country.

This 25 percent differential reflects the combination of higher prices Americans pay for the average doctor visit, brand-name prescription, day spent in a hospital, etc. Thus, even after applying the general PPP conversion factor to health (based on economy-wide prices), we would expect U.S. per capita health spending to be higher than in other OECD countries even if the standardized bundle of medical services being priced is identical (e.g., each average consumer uses, say, 4 physician visits per year, 1.1 hospital days, and 3 prescriptions).

The difficulties inherent in making international comparisons of output in general (or health sector output in particular) are even more severe when countries as different as the United States and Ethiopia are involved. Despite such measurement problems, there is no doubt that differences in per capita income and health spending are extremely large. On average, global per capita income is only about 22 percent of the U.S. average; in contrast, global per capita health spending amounts to only 13 percent of the average American’s.

In fact, more than 70 percent of the world’s population currently lives in nations with health spending per capita that is below 10 percent of U.S. levels in 2009—again using the GDP PPP to make these “apples-to-apples” comparisons (figure 1.7b). The concentration of world population in the group with fewer than 10 percent of U.S. per capita income and health spending is magnified by the inclusion of China and India, where almost 40 percent of the world’s population reside. This group also includes four of the world’s most populated countries (Indonesia, Bangladesh, Pakistan, and Nigeria).

Conover Figure 1.7b JPEG

Even so, less than one-tenth of the world’s population has a level of health spending that exceeds half of what the average American spends on healthcare.

To the degree that higher U.S. spending reflects access to better medical care, such as life-saving surgery or pharmaceuticals, some may believe that this lopsided allocation of resources is unfair. To the degree that higher expenditures by Americans results from waste, fraud, and abuse, concerns about equity may be superseded by worries about inefficiency. While experts disagree on the extent of waste in U.S. healthcare, the consensus seems to be that it is considerable.

What we know from peoples’ behavior is that the entire difference between the United States and other countries in health spending cannot be attributed entirely to higher prices and/or waste, fraud, and abuse. How do we know this? Consider, for example, that the late Senator Ted Kennedy had the resources to go anywhere in the world for the complex brain surgery that offered him the only opportunity for continued survival from brain cancer. Yet he did not fly to France—whose health system the WHO ranks as the number one in the world—nor did he go to Canada, even though the WHO likewise ranks that nation’s health system ahead of the United States and it is geographically closer to Massachusetts than Duke University Medical Center, where Senator Kennedy ultimately got his surgery.

The same logic applies to the brother of Senator Tom Daschle, who flew all the way from Japan (ranked number 10 by the WHO) to Duke for very similar surgery. The premier of Newfoundland likewise flew to the United States for heart surgery, even though this was much more expensive and geographically inconvenient than obtaining the identical procedure in Canada. And it is well-known that Arab sheiks—for whom money is no object—routinely travel to the United States to find the best medical care on the planet.

These cross-border health purchases somewhat contaminate all the country comparisons described earlier, since what they measure is health expenditures within a country’s borders. To take the premier of Newfoundland as an example, his U.S. surgery slightly elevated the level of health spending in the United States while artificially reducing the amount of spending attributable to Canadians. But in the grand scheme of things, this so-called medical tourism is a mere drop in the bucket that affects average per capita spending levels relatively little.

Although the United States consumes a disproportionate share of resources devoted to medical care, some readers may be surprised to learn that this global share is shrinking. In 1995, the percentage of global health spending accounted for by the United States was nearly 40 percent; by 2009, this share had declined by nearly one-tenth (figure 1.7c).

Conover Figure 1.7c JPEG

This decline was mirrored in the rest of the G7, whose overall share of worldwide health spending likewise fell during the same period. In contrast, the largest developing nations, the so-called “BRIC” countries (Brazil, Russian Federation, India, and China) saw their share of world health resources increase by nearly one half since 1995. In the rest of the developing world, the share grew by about one-quarter. Much of this increase was driven by population growth. However, of the ten most populous countries in the world, all but two—Japan and Pakistan—have experienced lower annual growth in health spending per capita than the United States between 1995 and 2009. Thus, even if the new healthcare law does nothing to constrain U.S. health expenditures, there is reason to expect a continued decline in the U.S. share of global health expenditures in the decades ahead.

When it comes to income, the rich may or may not be getting richer relative to the poor. When it comes to healthcare, the gap between the richest nations and poorest nations is even greater than the income gap. Nevertheless, the best evidence we have is that the healthcare gap is narrowing.

While it would be nice if the developing nations could avoid the inefficiencies in health spending that are pervasive among the most highly developed countries, there is also no question that one result of their higher levels of per capita health spending is lower rates of illness and premature death. All sides of the aisle presumably can agree that such improvements in outcomes are a very good thing.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released later this month by AEI Press. See PowerPoint versions of Figure 1.7a, Figure 1.7b, and Figure 1.7c and Excel spreadsheets on cross-national GNI and health expenditures from 1995-2009 for data, sources and methods.

FURTHER READING: Conover also writes “Romney, Perry, and Huntsman: A Tale of Three Governors,” “In Sickness or in Wealth,” “The Family Healthcare Budget Squeeze,” and “Is Medicare a Ponzi Scheme?” Joseph Antos contributes “The Wyden–Ryan Proposal—A Foundation for Realistic Medicare Reform.” Thomas P. Miller says “Repeal to Replace: Starting This Year.”

Image by Rob Green / Bergman Group

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