Latest posts by Tomas Philipson (see all)
- Are Europeans Spending Too Little On Health Care Compared To The U.S.? - December 22, 2014
It is common for health policy experts to argue that US health care spending is wasteful compared to its European counterparts because we are not getting better health for the larger amount of spending taking place here. There is limited evidence to support this claim, and existing evidence in the case of cancer care actually indicates Europeans under-spending rather than US over-spending. Arguments of waste in health care must be more nuanced and distinguish between waste in the public and private sectors.
The United States spends more on health care than other developed countries, about 18% of GDP, but some argue that US patients do not derive sufficient benefit from this extra spending. The high costs of cancer care in the United States are frequently cited as evidence of a poorly functioning health care system, compared to those of other developed countries, e.g. Europe. A common but misguided argument is that, since Americans are not healthier and do not live longer than Europeans, the additional spending in the US represents wasted resources. This assumes that health care is the main driver of health and longevity (which it is not) and that other factors such as genes, diet and exercise, accidents, violence, and harmful drug use are the same across countries.
Therefore, to better judge the relative productivity of health care in the US and Europe, it is necessary to examine the effects of spending in a specific disease area conditional on the same diagnosis. However, in the debate about whether higher US healthcare spending, compared to Europe, is wasteful, little reliable evidence of the comparative benefits of spending in specific disease areas has been generated.
Cancer is a good case to consider because it is a leading cause of death across many developed nations. Conditional on a cancer diagnosis, it is plausible that a relationship between spending and survival exists because of differences in cancer care rather than other factors leading to the diagnosis. Non–treatment-related investments by patients—in healthy behavior such as exercise and in other types of preventive activities—are likely to have a smaller impact on survival compared to actual treatment.
In a paper we published in Health Affairs,* we compared the value of US vs European cancer care in the 1980s and 1990s.** As shown in Figures 1 and 2, we examined survival and spending differences for cancer patients in the United States compared to a similar group of patients from ten European countries.
As the figures illustrate, our study found that US cancer patients both lived longer and spent more than European patients in every year. In addition, the absolute growth in survival gains and costs was larger in the US over the period considered from 1984 to 1999. We calculated the financial value of the additional years of survival in US in order to compare these gains to the costs of cancer care in these countries. The key finding was that, if one utilizes standard value measures for longevity, the value of survival gains in the US exceeded the higher cost growth compared to Europe.
In short, the extra spending for the extra living was worth it. In fact, US cancer care generated about $600 billion of additional value compared to Europe for patients who were diagnosed with cancer during this period. The value of that additional survival gain was highest for prostate cancer patients ($627 billion) and breast cancer patients ($173 billion), partly because of their larger prevalence.
Some criticized this study, without carefully reading it, for being driven by earlier diagnosis in the US. If longevity, measured as survival from time of diagnosis, rises faster simply because patients are diagnosed relatively earlier in US, this may create “lead-time bias.” However, in a companion study we found that the overall gain in survival of US cancer patients was only 20% due to detection of cancers in earlier stages, and 80% due to treatment once detected.*** Quantitatively, early detection does not negate our main conclusion: US cancer patients get more value than Europeans.
To exemplify these findings at the country level, consider Slovakia, which spent $39 per capita on cancer care and averaged 5.5 years’ life expectancy after cancer diagnosis. Compare this to Sweden, which spent $134 per capita on cancer care and averaged 9.9 years’ life expectancy after diagnosis. Now consider the US, which spent $207 per capita on cancer care and saw 10.8 years of life expectancy from the point of diagnosis.
These differences in US costs reflect—at least in part—more rapid uptake of new technologies that may lead to differences in survival. In prostate cancer treatment, several major changes were implemented in the United States in the 1980s and 1990s, including higher rates of radical prostatectomy; improvements in radiation therapy; and use of luteinizing hormone releasing hormone agonists, a type of drug that causes testosterone levels to fall in men.
Compared with the United States, European countries typically treated prostate cancer less aggressively, with lower use of these technologies during this time period. In addition, new cancer drugs often reach US patients sooner than their European counterparts, in part because of delays or denials of reimbursement decisions within Europe. For example, the drug trastuzumab (Herceptin), a major breakthrough in the treatment of breast cancer, was approved by the US Food and Drug Administration in 1998 and was quickly incorporated into clinical practice guidelines.
In contrast, trastuzumab was not launched until after 2000 in many European countries, including Finland, France, Germany, and Sweden. The National Institute for Health and Clinical Excellence in the United Kingdom, which evaluates the cost-effectiveness of new therapies to inform coverage and reimbursement decisions, did not recommend reimbursement and use of trastuzumab for breast cancer until 2002.
Despite a lack of supporting evidence, the majority of the health policy community argues that US health care is plagued with waste, especially compared to Europe. In this debate, though, it is important to distinguish between public-sector versus private-sector waste. As I have argued in this column before,**** there is likely a large amount of waste in the public payer sector run by the Medicaid and Medicare programs, compared to the private sector.
Though well-intended and hard-working individuals run these public programs, the basic fact remains that, because government bureaucrats do not improve their own material well-being by eliminating health care waste, any waste reduction depends on their own sense of mission and desire to do what is right rather than a profit motive. The fact that the biggest dollar crime in the US is Medicare fraud, sometimes estimated to be 15% of spending, underscores the problem—a problem that does not have a corollary among private payers because of tighter controls to support shareholder earnings.
However, health policy analysts do not distinguish between the private and public sector in its claims about waste in US health care. In my opinion, academics’ efforts to teach private insurance executives how to run their businesses is in itself a waste—namely of time and journal pages. Some academics and think-tanks have even claimed that as much as one third of health care is “wasted.” Really? These individuals claim to know the recipe for cutting the costs of private payers by a third without sacrificing quality of care and customer satisfaction.
Put simply, if these health care policy wonks were right that one could eliminate one third of the 3 trillion dollar health care tab without impairing quality, their ideas would be worth close to a trillion dollars. If true, they could become multi-billionaires by starting a new plan and slashing prices by a third. More immediately, private payers should be willing to go to great lengths to acquire these policy wonks’ knowledge, as payers could return billions to shareholders.
Indeed, one would expect payers to quickly bid out these analysts from their academic jobs if they truly held the secret to profitable health insurance, like the financial sector did in response to “financial engineering” developed by academics in the 1980s. However, no such bidding wars for these academics and their cost-cutting insights exist. This is likely for good reason, as these ideas—although popular in academic and policy circles—would likely be unpopular in real-world health care markets.
In sum, before cries of US waste is believed and accepted, better evidence is needed to support the claim and implementable actions, rather than words, needed to eliminate it.
*Philipson, T., M. Eber, D. N. Lakdawalla, M. Corral, R. Conti and D. P. Goldman (2012). “An Analysis of Whether Higher Health Care Spending in the United States Versus Europe Is ‘Worth It’ in the Case of Cancer.” Health Affairs 31(4): 667-675.
**This paper was also discussed at length in the Obama Administration’s annual Economic Report of the President in 2012, available here.
***Sun, E.. A. B. Jena, D. N. Lakdawalla, C. Reyes, T. J. Philipson and D. P. Goldman (2010). ” The Contributions of Improved Therapy and Earlier Detection to Cancer Survival Gains, 1988-2000.” Forum for Health Economics and Policy 13(2).
****Forbes, Oct 20, 2013, “What’s Wrong With Private Insurance?”
[First pubilshed at Forbes.]