Timothy T. Taylor Home Page
Journal of Economic Perspectives
Articles and Writing
Economics Textbook
Classroom Teaching
The Teaching Company
High School Pedagogy

Articles and Writing

February 22, 1994
"It's an American Tradition Going for Broke"
San Jose Mercury News
By Timothy Taylor
<< Back to 1994 menu

THE HIGH and rising level of U.S. health care costs is often blamed on the peculiar particulars of America's system for financing care: fee-for-service
medicine, third-party payers, tax breaks for employer-provided health insurance, highly technical care, and the like. The common inference is that if America adopted an alternate system -- resembling those in Canada or the United Kingdom or Germany -- then health care costs would fall dramatically.

But matters aren't that simple. For the United States, high health care costs may be a problem that goes deeper than policy reforms, and has become part of American culture. As the top row of the table shows, U.S. health care spending per person has climbed dramatically. U.S. health care costs per person have increased an average of 5.2 percent per year faster than inflation between 1960 and 1990.

However, costs in many other countries climbed just about as fast, or faster. For example, the U.S. spent 31 percent more per person than Canada in 1960, when Canada had not yet enacted its national health plan and the United States had not yet adopted Medicare and Medicaid. By 1990, however, the United States was spending 35 percent more per capita.

Apparently, the U.S. spends about one-third more than Canada, regardless of whatever major changes occur in the Canadian or U.S. health care systems.

Between 1960 and 1980, per capita U.S. health care costs actually rose more slowly than costs in Germany, France, Italy, and Japan. In Italy and Japan, rapid economic growth in those two decades was the main force driving health care spending higher.

The United Kingdom, with its combination of relatively slow economic growth and a centrally controlled health care system, had the slowest growth in health care spending. But even in Britain, per capita health spending has increased by an average of 4 percent per year faster than the rate of inflation over the last 30 years.

No national system has proven particularly adept at holding down the rate of increase in health care spending. Many health care economists believe that this is because new medical technology -- not paperwork, or high corporate profits, or malpractice suits, or any of the other commonly cited demons -- is the driving force behind health spending increases all around the world.

The Clinton health plan sets a target of zero real increase in per person health care spending by 1999. No industrialized country is likely to meet that goal, whatever its system of health care.

An alternate perspective on health care spending focuses on its overall level, rather than its rate of increase. The last column of the table illustrates the issue; on a per person basis, the United States spends 35 percent more than second-place Canada, and more than double the amount spent in Japan and the United Kingdom.

From this view, maybe health care reform won't slow the long-term growth rate of health costs, but it could generate large one-time savings, perhaps by reducing administrative and paperwork costs. Then, even if technology-driven cost increases continue, at least they would proceed from a lower starting point.

As a matter of arithmetic, this hope is somewhat pathetic. To see why, imagine that changing America's health care system creates a one-time savings of 25 percent -- that is, about $240 billion per year. But if U.S. health care costs continue rising at 5 percent per year, those savings will be wiped out in five years, and we'll be right back where we are today.

Moreover, the international comparisons don't offer much hope that altering a health care system will dramatically change the amount that is spent.

Back in 1960, the U.S. and Canada spent by far the most on health care; Japan, the UK, and Italy spent the least; and France and Germany were in the middle. Three decades later, after all seven countries had lived through substantial and repeated changes in their health care systems, as well as in their economies, those spending rankings remain much the same.

In the end, the only successful method of holding down health care spending is to develop a broad social consensus in favor of that goal, as has happened in the UK since 1960, or in Germany during the 1980s. In the United States, by contrast, health care providers and patients have spent at least a generation developing a culture of high health care spending.

At nearly $1 trillion per year, the U.S. health care system is more than triple the size of the defense budget. And even though a bipartisan consensus has supported reducing defense spending in these last few years, the reductions have been halting and painful.

Bringing health spending under control will probably require not only a change in laws (although that is a good and necessary start), but also a fundamental change in American expectations of what medical care is necessary and appropriate. Even if such a change is good for the economy and good for our health, it will be bucking decades of tradition, and it will be extraordinarily difficult.

The table shows what various countries spend for health care per capita. The amounts are all adjusted to be in 1990 dollars.

1960 1970 1980 1990
United States $578 $1110 $1541 $2600
Canada 440 812 1077 1915
Germany 396 674 1175 1659
France 303 651 1012 1650
Italy 153 491 828 1408
Japan 109 407 750 1267
United Kingdom 319 471 664 1043

Source: OECD Health Systems, Vol. II, 1993, Table A2.1.2. Exchange rate conversions at purchasing power parity rates. Inflation adjustments made with consumer price index.

<< Back to 1994 menu