Canada is known for many things, including its natural beauty, its diverse population and its vibrant cities. In America’s political debates, Canada is also known for its single-payer health system, which, in a neat coincidence, is called Medicare. Many Americans admire Canada’s single-payer health system, and it is easy to see why. Every Canadian knows that she is covered by the system, without having to purchase private insurance or to seek coverage through an employer. That means that one can change jobs or move across country without having to worry too much about protecting yourself against big-ticket medical expenses.
Those who envy Canada’s health system also point to the fact that Canadians spend much less on health care as a share of gross domestic product than the United States. Indeed, Canada’s example is often offered as a reason for the United States to embrace a single-payer system of its own. President Obama is one of many to have said that he’d favor single-payer if he were starting the U.S. health system “from scratch.”
What Canada’s American admirers tend not to know is that between 2002 and 2008, Canadian health spending grew at a rate of 5.7 percent while U.S. health spending grew at a rate of 5.5 percent. And in the late 1990s, health spending in the two countries was also not that far apart. As the blogger Noah Millman has observed, the same is true when we compare the United States to a number of other rich countries. Together with David Joerg, Millman prepared a chart comparing the annualized growth rate in per capita expenditures between the United States and a 10-country comparison group (Belgium, Canada, Denmark, France, Germany, Japan, Netherlands, Sweden, Switzerland and the United Kingdom). The thing that really leaps out at you about the chart is that America’s health spending seems to have gone haywire in the 1980s.
It turns out that through the 1970s, U.S. health spending was in the same ballpark as other rich countries, with the important exception of Britain. The 1970s were a decade in which virtually all rich countries were plagued by high inflation, and the health sector was no exception. But in the 1980s, as Millman explains, the U.S. broke from the rest of the pack. Health spending continued to grow at double digits while it slowed down dramatically elsewhere. Once we enter the 1990s, U.S. health spending once again started growing at similar rates to the other countries in its peer group. By then, however, U.S. health spending was growing off of a much higher base level, which is why slowing the rise in this kind of spending has become our central domestic policy challenge.
So if the real problem with U.S. health spending is that the U.S. diverged from its peer countries for a decade-long stretch, solving that problem isn’t quite as simple as mimicking the institutions and strategies of our peer countries, whether it’s Canada’s single-payer system or the hybrid models of France or Germany. Our peer countries are facing the same challenges we are, albeit with slightly more breathing room.
This raises the question of what exactly changed in the 1980s. Daeho Kim, a graduate student at Brown University, offers a provocative hypothesis in a new working paper. As Kim explains, a 1983 Medicare reform created the prospective payment system, or PPS, which offered fixed reimbursements for the use of a medical technology. If a physician decides to use bypass surgery as a cardiac treatment, she won’t be paid on the basis of what it cost her to perform the surgery. Instead, she’ll be paid the national average cost. This way, there is a strong incentive to beat the national average cost of performing bypass surgeries, thus lowering, in theory, systemwide costs.
But something quite different seems to have happened. A big part of the story is that providers can choose from a number of different cardiac treatments, some of which are more expensive than others. PPS encouraged them to focus on the treatments where the marginal cost — the cost of providing one more treatment, in this case — fell below the average cost, even if there are more cost-effective treatments available. Kim suggests that PPS may account for one of the most distinctive aspects of the U.S. health system — our extraordinary overreliance on costly treatments. If Kim is right, it is the failure of bureaucratic price-setting, not the failure of market competition, that may have supercharged health inflation in the 1980s and beyond. We could try to create better price-setting mechanisms. Or we could accept that centralized bureaucracies are just not very good at allocating resources.
The fact that U.S. health inflation is not out of line with countries like Canada only underlines the challenge we face. The U.S. doesn’t just need to match the performance of health systems abroad. Rather, the U.S. needs to leapfrog them — to actually lower the cost of high-quality medical care. A growing number of people, including veterans of Democratic and Republican administrations, are convinced that a more market-oriented system is our best bet to achieve that goal. Unfortunately, they have to tangle with the incumbent medical providers who profit handsomely from the status quo.
Those who envy Canada’s health system also point to the fact that Canadians spend much less on health care as a share of gross domestic product than the United States. Indeed, Canada’s example is often offered as a reason for the United States to embrace a single-payer system of its own. President Obama is one of many to have said that he’d favor single-payer if he were starting the U.S. health system “from scratch.”
What Canada’s American admirers tend not to know is that between 2002 and 2008, Canadian health spending grew at a rate of 5.7 percent while U.S. health spending grew at a rate of 5.5 percent. And in the late 1990s, health spending in the two countries was also not that far apart. As the blogger Noah Millman has observed, the same is true when we compare the United States to a number of other rich countries. Together with David Joerg, Millman prepared a chart comparing the annualized growth rate in per capita expenditures between the United States and a 10-country comparison group (Belgium, Canada, Denmark, France, Germany, Japan, Netherlands, Sweden, Switzerland and the United Kingdom). The thing that really leaps out at you about the chart is that America’s health spending seems to have gone haywire in the 1980s.
It turns out that through the 1970s, U.S. health spending was in the same ballpark as other rich countries, with the important exception of Britain. The 1970s were a decade in which virtually all rich countries were plagued by high inflation, and the health sector was no exception. But in the 1980s, as Millman explains, the U.S. broke from the rest of the pack. Health spending continued to grow at double digits while it slowed down dramatically elsewhere. Once we enter the 1990s, U.S. health spending once again started growing at similar rates to the other countries in its peer group. By then, however, U.S. health spending was growing off of a much higher base level, which is why slowing the rise in this kind of spending has become our central domestic policy challenge.
So if the real problem with U.S. health spending is that the U.S. diverged from its peer countries for a decade-long stretch, solving that problem isn’t quite as simple as mimicking the institutions and strategies of our peer countries, whether it’s Canada’s single-payer system or the hybrid models of France or Germany. Our peer countries are facing the same challenges we are, albeit with slightly more breathing room.
This raises the question of what exactly changed in the 1980s. Daeho Kim, a graduate student at Brown University, offers a provocative hypothesis in a new working paper. As Kim explains, a 1983 Medicare reform created the prospective payment system, or PPS, which offered fixed reimbursements for the use of a medical technology. If a physician decides to use bypass surgery as a cardiac treatment, she won’t be paid on the basis of what it cost her to perform the surgery. Instead, she’ll be paid the national average cost. This way, there is a strong incentive to beat the national average cost of performing bypass surgeries, thus lowering, in theory, systemwide costs.
But something quite different seems to have happened. A big part of the story is that providers can choose from a number of different cardiac treatments, some of which are more expensive than others. PPS encouraged them to focus on the treatments where the marginal cost — the cost of providing one more treatment, in this case — fell below the average cost, even if there are more cost-effective treatments available. Kim suggests that PPS may account for one of the most distinctive aspects of the U.S. health system — our extraordinary overreliance on costly treatments. If Kim is right, it is the failure of bureaucratic price-setting, not the failure of market competition, that may have supercharged health inflation in the 1980s and beyond. We could try to create better price-setting mechanisms. Or we could accept that centralized bureaucracies are just not very good at allocating resources.
The fact that U.S. health inflation is not out of line with countries like Canada only underlines the challenge we face. The U.S. doesn’t just need to match the performance of health systems abroad. Rather, the U.S. needs to leapfrog them — to actually lower the cost of high-quality medical care. A growing number of people, including veterans of Democratic and Republican administrations, are convinced that a more market-oriented system is our best bet to achieve that goal. Unfortunately, they have to tangle with the incumbent medical providers who profit handsomely from the status quo.
