We've been looking at the challenge of health in the very poorest parts of the world.

I'm gonna move all the way to the other end of

the income spectrum and look at the challenge

of health in the upper-income countries in the richest parts of the world.

You'd say, what is the challenge?

Life expectancy is high and the healthcare system is technically very sophisticated.

And while in the poor countries we scramble and wrack our brains to figure out

how to reach a level of $60 per person per year,

in the high-income countries,

the spending is typically around $3,000-$4,000 per person per year in the public budget.

And if one looks in the United States at public and private spending for help,

it's $8,000 dollars per person per year.

What's the problem? Well the problem,

especially in the United States,

is $8,000 per person per year.

The health system has become incredibly expensive,

so expensive that it is a major burden on the economy,

a major burden on the budget,

a major burden on poor people who are priced out of

the healthcare market even in the rich countries and especially

among those rich countries and the United States where we have high inequality of

income and prices of healthcare completely out of sight,

and as we've seen earlier,

a rather limited or tattered social safety net,

so many people not covered by government programs.

The puzzle I want to explore is a specific one

to the United States in one sense: why is the U.S. healthcare system so expensive?

But it is a more general lesson about the role of

the public and the private sector in healthcare provision.

One of the reasons why the U.S. system is so expensive

is that it is a privately oriented health delivery system.

Well, something isn't right about that from the point of view of

the common insistence that the private sector is very

efficient and the public sector is bureaucratized and very costly.

In the United States where healthcare is provided mostly by private sector providers,

the costs are completely out of sight,

and this is purpose that I'd like to look into now to

understand why that is because it teaches

something more general for health systems around the world,

it helps us to understand what are the boundaries

between public and private, and in general,

it helps us to overcome a presumption,

among at least some people,

that the free market is always the solution to one's problems.

Well, we don't believe that in sustainable development

because we see that these solutions to the challenges of

sustainable development require the interaction and often the cooperation of government,

business, civil society, and academia.

But sometimes, it's argued naively,

let the markets do it and the problems will be solved.

In the United States, while healthcare is by no means a free market commodity,

it's more market-oriented than in just about any other high-income country,

and the results are peculiar to say the least.

Well, we should know right from the start that health isn't

exactly a normal-market kind of commodity.

For one reason, it's a merit good.

We want health to reach everybody.

Once it's a merit good,

it's quite different from a can of soda or a piece of furniture or a new kind of car.

Those may be desirable goods to some people,

but they're not merit goods in the sense that we would expect on

a moral or ethical basis a universal coverage of those commodities.

They're not a basic human right.

So we know that health starts out in a very specific situation just as does education.

We also know, therefore,

that public provision of those services is important,

if for no other reason than to help ensure that the poor

alongside the rich are able to gain access to those merit goods.

But the problem goes even deeper than that.

Kenneth Arrow, the great Nobel laureate economist,

observed all the way back,

now, 50 years ago,

indeed, that health could not really operate like

a competitive market sector because there's

a fundamental problem: patients do not know what's best for them in general.

There's a huge asymmetry of information.

And Kenneth Arrow noted that when there is such an asymmetry of information,

it violates one of the basic assumptions of the free market economy,

or I should say the basic assumptions of why the free market economy works well,

and that is full information of consumers as well as information of suppliers.

What happens when only the suppliers have the information?

You go into your doctor and your doctor says,

"You need such and such test."

Generally, if you're like me,

you say, "You got it.

Let's go for it."

Maybe you go online and you see a whole debate about this,

but then you don't know what to do,

you ask for a second opinion or a third opinion somewhere;

you're going to most likely listen to what the doctor says.

In the United States, oddly enough,

doctors own a lot of the imaging equipment

for CAT scans or for X-rays or for other equipment.

They order a lot of tests,

and there is inherently a problem.

When there is asymmetric information, asymmetry of information,

and the supplier is the one that has the knowledge and

the consumer is the one that generally follows along,

one can see that if the incentives are not done just right,

one could get overuse,

overcharge, and overbilling of consumers who are in the hands of their doctors.

Moreover with health, if you're like me,

you don't want to play around,

and especially if somebody is very sick,

you don't start negotiating in the emergency room or in the coronary care unit.

When the doctor or the hospital says that something's needed,

almost all of the time,

you say, "Yes, please proceed."

And this is, at its core,

one of the fundamental barriers to simply organizing

the health sector as a normal market activity.

There are others.

Health requires insurance because bad luck,

a bad bout of disease,

a person stricken with a very costly ailment would not be able to pay out of pocket,

so people buy insurance in the United States or

receive a public insurance in other countries.

And with insurance markets, there are many,

many problems as well.

One problem with insurance markets is if individuals

know their health conditions but the insurance company doesn't necessarily,

perhaps only the sick will register for insurance,

and if they're asymptomatic,

they will sign on as needed, healthy people won't.

The insurance companies will find that their burdens of disease are unexpectedly large,

they'll raise the fees.

That will keep healthy people outside of the system.

Only the sick or those who have a likelihood of becoming sick will be covered,

and what can ensue is sometimes called an insurance death spiral where

a smaller and smaller but sicker and sicker proportion of

the population is faced with insurance,

prices soar for the insurance premia,

and the rest of the population opts out or

simply rationed out of the market by the very high costs.

Another aspect of the health system that I think is quite notable is

that it is a system with a sick patient facing

a complicated set of conditions that you want the generalists to be

dealing with several specialists and you don't want

each specialist taking all of the same tests again.

You would like the doctors analyzing a case to be working in a systematic,

cooperative way in which information is freely flowing throughout the system.

Sometimes healthcare works like that,

but very often it does not.

If it's not organized that way,

if individual doctors have their individual practices,

then a private market economy can drive up the cost considerably.

If the government reimburses private providers in

particular ways that do not encourage the building of those systems,

it makes matters even worse.

Well, now you're looking at a graph where

that dotted black line at the top

is the cost of spending in the United States per person.

It's soaring.

Back in 1980,

the average spending on health per person in

the United States was about $1,000 per person;

by the year 2009,

$8,000 per person and you can see,

by far, the most expensive in the world.

Norway, another rich country,

comes next, but at a level much lower, say,

$5,500 per capita, roughly $2,500 per person less than in the United States.

And in general, the rest of the countries are clustered around this lower level.

Typical spending, perhaps around $4,000 per person per year outside of the U.S.,

half of the U.S. level.

If you look at the next graph,

you see the spending now divided by national income because we're looking

at the share of health outlays as a percentage of income.

And you can see that back in 1980,

the United States was spending about nine percent of its national income on health.

By 2009, that had doubled to 18% of national income.

Notice that back in 1980,

all of the countries, including the U.S.,

were rather tightly clustered between six and nine percent of national income.

Since then, the U.S. has separated from the pack,

becoming by far the most expensive healthcare system in the world.

In general, health costs have been rising and

health outlays as a share of national income have been increasing,

but in other places not by anything close

to the increase experienced in the United States.

You can see that as of 2009,

for most countries the spending is on the order of about 10% of gross national product,

not the 18% in the United States.

Well, this is shown for the year 2011 in the next bar chart.

Again, you see that the United States,

all the way on the right,

has the highest level of spending as a share of gross domestic product.

The next chart also,

this set of columns by country,

also for the year 2011,

shows the United States as another kind of outlier.

What this graph is showing is the proportion of the total spending,

say the U.S. 8,000,

that comes from private spending,

maybe the households buying health insurance,

maybe the employer in the private sector paying for healthcare,

maybe people paying out of pocket as opposed to what government programs are funding.

What you can see is that the private health outlays in

the United States are a bit over half of the total spending,

so a bit more than $4,000 per person comes from private spending by the households,

the employers, and so forth.

But in all the rest of the high-income countries,

the share of private spending is much less.

Or to put it the other way,

the proportion of total health spending by government is much higher.

In essence, the U.S. runs a system that is partly public,

partly private, with an accent, I would say,

on the private sector whereas most of the rest of the high-income world runs essentially

a public finance system with a small private sector alongside.

The U.S. is the only one that goes for

a very big private sector and

private spending that accounts for more than half of the total.

What's the problem?

The problem evidently is that the private sector in the U.S. is very high priced.

And what essentially is at play is the observation that

Kenneth Arrow made 50 years ago: this is not a very competitive sector.

Price competition does not work very well.

In fact, individual patients often have

no idea of how the price they're paying compares with the price paid by

other patients so much so that

hospitals themselves engage in what's called price discrimination,

charging very different prices to different patients within the same hospital unit.

Shocking, actually.

Because there is no standard public price that applies for all,

there is instead a very hard-to-understand negotiating process where the unwary U.S.

health consumer spends often far more than the hospital charges

to other patients facing

the very same kinds of treatments and with the very same kinds of conditions.

The result is that hospitals get away with a lot.

They are not competitive.

They price discriminate.

The prices that they charge are indeed very, very high.

And one can see this in

a systematic comparison of U.S. costs with the costs in other high-income countries.

In the United States, for example,

if the U.S. cost of 30 commonly prescribed medicines is set at an index of one,

then the cost in New Zealand is 0.34,

one-third of the US cost;

the cost in Australia,

0.49, in other words,

one half of the US cost of those medicines;

in the Netherlands, 0.45,

in other words, 45% or 45 cents on the dollar of what's spent in the United States.

If you look at the cost of a visit to a physician,

you can see that while the cost of a physician paid for by a public sector program, $60,

is comparable to what is paid for in other countries,

the cost that's paid for by a private payer

out of pocket or a private insurance company is out of sight.

It's twice the amount paid for by the public payer

and it's much more in general than paid for in most other countries.

Well, condition after condition,

intervention after intervention, the U.S. system is simply out of sight.

If, on average, a hip replacement is for a private payers is $2,000;

in the United States, it's $4000.

And this high price is found in every aspect of the U.S. system.

One can look at the spending for each patient discharged from a hospital,

how much was spent on that patient.

In the United States in 2009,

it was $18,000 per hospital discharge;

in France and Germany,

less than a third of that all the way at the other end

of this graph in the average of the OECD,

that is, the high-income country group,

one-third of the discharge cost on average in the United States.

U.S. doctors make far more than doctors do in other countries.

Orthopedic physicians in the United States make $440,000 in 2008;

in Germany, less than half of that, $202,000.

So we can see that, essentially,

the US system is remarkably expensive,

not because it's delivering a huge range of things that other countries are not doing,

not because the outcomes are better,

but because the unit cost of the interventions is simply out of sight.

What are some of the causes of this?

Well you could say this is very specific to the U.S. though,

that's an important economy,

but I think the lessons are more general.

In the United States,

some of the things keeping the high costs high are the limited supply of doctors,

controlled by the American Medical Association itself which works with

the medical schools to determine the flow of new doctors;

market power, that is,

the lack of competition through price discrimination in the hospitals,

through highly concentrated ownership of major hospitals in a region,

by the conflict of interest of doctors who own

their own diagnostic laboratories and then prescribe heavily imaging,

for instance, MRIs or CAT scans on equipment that they themselves own.

We see drug pricing at levels far above what is priced in other countries,

often because of close tie-ups between the doctors and the pharmaceutical companies.

Enormously high administrative cost because in the US,

in the private economy, each hospital, perhaps,

or each group of hospitals has its own insurance connectors,

the systems of different kinds of payers, public and private,

don't communicate very well with each other whereas in other countries,

in many cases, there is one,

single payer, the government,

and the government may be at the provincial or the national level,

pays all the health bills,

and so the administrative cost of managing

America's more privately-oriented system is very high.

And I'll add one final huge dimension: political economy.

The health sector in the United States is powerful.

It is one of our four most powerful lobbies in the United States,

just alongside Wall Street, the financial markets,

number one; big oil,

number two; health sector,

number three; and the military industrial complex,

number four – four giant,

powerful lobbies in the United States that

also helped to prevent remedial action on these issues.

Now, one of the leading organizations in understanding the U.S. health system,

the Institute of Medicine of the U.S. National Academy of Sciences, did a recent study.

They found something extraordinary: that the waste,

fraud, and abuse in the system, the overbilling,

the waste of resources,

the repeated tests, the outright fraud,

the high management costs amounted to 5% of U.S. national income.

That's astounding.

5% of U.S. national income is,

with a $15 trillion annual economy,

nothing short of $750 billion a year in waste.

And when you put that into context,

the U.S. is spending 18% of gross national product in health,

and what the Institute of Medicine is suggesting is that maybe out of that 18%,

it's getting 13% of national income in real value.

Well why does this system persist?

Partly because of its history of having organized itself as

a private sector economy that is not

effective and doesn't obey the principles of free markets,

but partly because of the power of the lobby.

And if you look at total lobbying outlays according to various sectors,

you find something quite astounding.

Adding up all of the registered lobbying outlays between 1998 and 2012,

while miscellaneous businesses abroad grab that category,

comes number one in the list,

number two in the list is the health sector.

More than $5 billion of lobbying by private health companies to Congress,

telling congressmen and the president and others influenced by this, don't regulate us.

Don't force us to expose our price discrimination.

Don't regulate us as other countries do so that there's

one price that applies to all patients within a certain category.

Don't regulate the prices that pharmaceutical companies charge

on their patent-protected medicines, and so forth.

Don't try to reduce administrative costs.

Those are our profits, those are earnings,

those are our employment,

say the big health insurers.

And they do this through mega-lobbying.

They also do it through campaign financing,

shown on the next page.

It's the fifth of the sectors from the top in the amount of

financing spent by the industry during the most recent campaign cycle,

complete campaign cycle of 2011 to 2012.

The health sector contributed,

and this means people from within

health companies registered as they made campaign contributions,

giving about $260 million of campaign contributions.

You can understand that this leads to some attentiveness of

the politicians to the interest of this concentrated group,

not necessarily to the interest of the taxpayers or the citizens more generally.

What are some of the reform options?

Let me conclude with that.

First would be to move to a single-payer system, like Canada has.

It's not simply in the imagination,

it's in the real world.

And Canada's health system is far lower cost than the United States,

with very high quality.

A second possibility is what's called an all-payer system.

Sure, money would come from private employers,

from out of pocket, from private insurance,

but there would be one price paid per condition or

diagnostic category or per individual covered per year,

rather than price discrimination where the hospital

or the private health provider tries to get as much as possible,

and if the unwary consumer doesn't realize it,

it fleeces the unwary consumer by imposing

cost far higher and prices far higher than other patients are paying.

A third possibility is even more transparency,

a certain fee paid by government or by employers per patient per year,

so it's not on the basis of services rendered,

not on the number of tests,

not on the number of hospital visits,

that the provider would have to

provide efficiently and at low cost if they want to make a profit.

And so, another possibility is what's called capitation,

that the insurance company or the government would provide one amount of

money per year rather than fee for service.

Another aspect would be increase supply,

to remove the ability of the American Medical Association

to constrict narrowly the number of doctors and specialists that come on line.

And finally, I would mention how technology can be the friend

of lower costs with information technology,

smarter systems, patients monitoring their vital signs at home, or telemetry,

where a patient's information is automatically being read at a distance at

low cost and the patient comes in for visits only when the indication is there,

or community health workers,

as in the low-income countries working in

the high-income countries to reach people in their communities,

rather than waiting for mega disease costs in the hospitals themselves.

Plenty of reform, plenty of way forward,

partly changing the incentives,

partly deploying new technologies.

Of course, that kind of reform also depends on politics.

If the lobbies get their way,

you get inflated cost.

If this is a system that is run for the public benefit,

there is tremendous good that can be done to reach more people,

improve health outcomes, and accomplish that,

especially in the United States at considerably lower cost.

The Challenges of Health Coverage in High-Income Countries

The Age of Sustainable Development

Meet the Instructors