Health Care Spending in the United States and Other High-Income Countries Irene
Papanicolas, PhD; Liana R. Woskie, MSc; Ashish K. Jha, MD, MPH
The US spent approximately twice as much as other high-income countries on medical care,
yet utilization rates in the US were largely similar to those in other nations. Prices of labor
and goods, including pharmaceuticals and administrative costs are major drivers of the
differences in overall cost between the US and other high-income countries. Efforts targeting
utilization alone are unlikely to reduce the growth in health care spending in the US; a more
concerted effort to reduce prices and administrative costs is likely needed.
Folland S, Stano M, Goodman AC. (2017). Chapter 1: Introduction . In The Economics of
Health and Health Care (pp. 1–17).
The study of health economics is important and interesting in thee related ways:
● The size of the contribution of the health sector to the overall economy.
○ Share of GDP, capital investment, share of the labor force.
○ Possible explanations for the substantial increase of healthcare costs in the
US:
■ People may be buying more health services.
■ People may be buying higher-quality health services.
■ Health care inflation may be higher than the general inflation rate.
○ Because it accounts for such a large share of the domestic product,
the size of the health economy is also reflected throughout other
key indicators. At personal level → 1. share of income spent on
medical care and 2. number of jobs in the health economy.
○ Reflecting the increases in spending, the health care sector serves
increasingly as a source of employment.
○ In addition to labour, a substantial amount of capital has been drawn to the
US healthcare system.
○ Data of health care expenses and labor and capital inputs reflect only some of
the items used by people to produce health. Inputs that are not bought and
sold in the marketplace are also important. These include people’s own
contributions of time and effort in producing health care and entail real costs
to society.
○ The contribution of health resources to the economy is ultimately a measure
of the value of the output, health itself.
● The national policy concerns resulting from the importance many people attach to the
economic problems they face in pursuing and maintaining their health.
○ The hospital and physician care prices have risen much faster than the CPI, a
phenomenon that is typical of other health care services and commodities as
well. Medical price inflation is a common problem for maintaining health
programs, and it has spurred numerous cost-containment efforts by the
government.
○ Increases in the quality of care contribute to spending increases. Quality is
ensured through professional licensure and certification and through quality-
assurance programs.
● The many health issues that have a substantial economic element.
Features of economic analysis:
● Scarcity of societal resources
, ○ Economic analysis is based on the premise that individuals must give up
some of one resource in order to get some of another.
○ Increasing shares of GPD going to health care ultimately imply decreasing
shares available for other uses.
● Assumption of rational decision making
○ Making choices that best further one’s own ends given one’s resource
constraints.
● Concept of marginal analysis
○ Marginal analysis often entails the mental experiment of trading off the
incremental costs against the incremental benefits at the margin.
● Use of economic models
Health outcomes are difficult to predict and may even be difficult to attribute to past
behaviours and care. These facts make it complicated to develop markets for risk sharing,
and needed insurance markets may fail to develop. To overcome this, partly, health care
markets may rely on institutional norms and other institutions such as licensure.
Because of the uncertainty in health care the demand for health care is irregular in nature
from the individual’s perspective, likewise, the demand facing a healthcare firm is irregular.
Uncertainty is also prevalent on the supply side.
The separation of spending from the direct payment for care must weaken some of the price
effects that might be expected in standard economic analysis. Insurance changes the
demand for care, and it potentially also changes the incentives facing providers. How the
insurers pay the health care firm thus becomes a critical fact of economic life. Changes in
insurance payment procedures can substantially change provider behaviour and provider
concerns.
Uncertainty can in part be attributed to lack of information. This lack of information often
makes an individual consumer, principial, dependent on the provider, as an agent, in a
particular way. The provider offers both the information and the service, leading to the
possibility of conflicting interests.
The health care sector had developed many practices that effectively restrict competition.
Regulation to promote quality or to curb costs also reduces the freedom of choice of
providers and may influence competition.
Folland S, Stano M, Goodman AC. (2017). 19 Government Intervention in Health Care
Markets excl sections 'Government involvement etc" and “The theory of yardstick etc.” In
The Economics of Health and Health Care (pp. 507–517).
Papanicolas, PhD; Liana R. Woskie, MSc; Ashish K. Jha, MD, MPH
The US spent approximately twice as much as other high-income countries on medical care,
yet utilization rates in the US were largely similar to those in other nations. Prices of labor
and goods, including pharmaceuticals and administrative costs are major drivers of the
differences in overall cost between the US and other high-income countries. Efforts targeting
utilization alone are unlikely to reduce the growth in health care spending in the US; a more
concerted effort to reduce prices and administrative costs is likely needed.
Folland S, Stano M, Goodman AC. (2017). Chapter 1: Introduction . In The Economics of
Health and Health Care (pp. 1–17).
The study of health economics is important and interesting in thee related ways:
● The size of the contribution of the health sector to the overall economy.
○ Share of GDP, capital investment, share of the labor force.
○ Possible explanations for the substantial increase of healthcare costs in the
US:
■ People may be buying more health services.
■ People may be buying higher-quality health services.
■ Health care inflation may be higher than the general inflation rate.
○ Because it accounts for such a large share of the domestic product,
the size of the health economy is also reflected throughout other
key indicators. At personal level → 1. share of income spent on
medical care and 2. number of jobs in the health economy.
○ Reflecting the increases in spending, the health care sector serves
increasingly as a source of employment.
○ In addition to labour, a substantial amount of capital has been drawn to the
US healthcare system.
○ Data of health care expenses and labor and capital inputs reflect only some of
the items used by people to produce health. Inputs that are not bought and
sold in the marketplace are also important. These include people’s own
contributions of time and effort in producing health care and entail real costs
to society.
○ The contribution of health resources to the economy is ultimately a measure
of the value of the output, health itself.
● The national policy concerns resulting from the importance many people attach to the
economic problems they face in pursuing and maintaining their health.
○ The hospital and physician care prices have risen much faster than the CPI, a
phenomenon that is typical of other health care services and commodities as
well. Medical price inflation is a common problem for maintaining health
programs, and it has spurred numerous cost-containment efforts by the
government.
○ Increases in the quality of care contribute to spending increases. Quality is
ensured through professional licensure and certification and through quality-
assurance programs.
● The many health issues that have a substantial economic element.
Features of economic analysis:
● Scarcity of societal resources
, ○ Economic analysis is based on the premise that individuals must give up
some of one resource in order to get some of another.
○ Increasing shares of GPD going to health care ultimately imply decreasing
shares available for other uses.
● Assumption of rational decision making
○ Making choices that best further one’s own ends given one’s resource
constraints.
● Concept of marginal analysis
○ Marginal analysis often entails the mental experiment of trading off the
incremental costs against the incremental benefits at the margin.
● Use of economic models
Health outcomes are difficult to predict and may even be difficult to attribute to past
behaviours and care. These facts make it complicated to develop markets for risk sharing,
and needed insurance markets may fail to develop. To overcome this, partly, health care
markets may rely on institutional norms and other institutions such as licensure.
Because of the uncertainty in health care the demand for health care is irregular in nature
from the individual’s perspective, likewise, the demand facing a healthcare firm is irregular.
Uncertainty is also prevalent on the supply side.
The separation of spending from the direct payment for care must weaken some of the price
effects that might be expected in standard economic analysis. Insurance changes the
demand for care, and it potentially also changes the incentives facing providers. How the
insurers pay the health care firm thus becomes a critical fact of economic life. Changes in
insurance payment procedures can substantially change provider behaviour and provider
concerns.
Uncertainty can in part be attributed to lack of information. This lack of information often
makes an individual consumer, principial, dependent on the provider, as an agent, in a
particular way. The provider offers both the information and the service, leading to the
possibility of conflicting interests.
The health care sector had developed many practices that effectively restrict competition.
Regulation to promote quality or to curb costs also reduces the freedom of choice of
providers and may influence competition.
Folland S, Stano M, Goodman AC. (2017). 19 Government Intervention in Health Care
Markets excl sections 'Government involvement etc" and “The theory of yardstick etc.” In
The Economics of Health and Health Care (pp. 507–517).
