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“It’s the Prices, Stupid” Redux: Remembering Health Economist Uwe Reinhardt

by | Dec 14, 2017 | Health Care

On November 13th, Princeton professor and world-renowned health economist Uwe Reinhardt passed away. His work focused on the American health care system, and he attempted to figure out how the US health system is different from other Organization for the Economic Cooperation and Development (OECD) countries. He and his fellow co-authors wanted to take a closer look at various metrics in health care and the economy to figure out what exactly makes our system so different and expensive.

Before Reinhardt’s research, there were already several theories about why health care is so expensive in the United States: high administrative costs, overuse of services, specialist use, pharmaceuticals, technology, a high uninsured population, and an aging population, to name a few. These issues certainly do contribute to our high health care costs. However, when he and his fellow researchers explored the data, looking to compare what characteristics make the American health system so unique (and expensive), they found that it came down to one major factor: the provider prices.

Here’s a quick rundown of what one of Reinhardt’s most widely-cited articles (published in 2003) looked at. The article started by taking a look at how the various OECD countries compared in costs per capita and respective spending for private health care and public health care. The United States, unsurprisingly, led the way with by far the highest spending per capita for health care, as well as the highest percent of spending on private health care. Back in 2000, the US was spending over 13% of GDP on health care, while the OECD median was 8%. That number has since risen to 17.6% as of 2010, and now rests at 17.9% of GDP according to the Centers for Medicare and Medicaid (CMS). For comparison, the average OECD GDP spending only rose to 9.5% in 2010.  

The US paid approximately the same amount of money towards public insurance as the rest of the OECD in 2000.  However, the US had an outsized portion of the GDP going to private health care (about 7.2% overall).  The researchers also found that the US spends more per capita on pharmaceuticals than any other OECD country, although the difference is not as great as other services (like hospital services or diagnostics).

They also examined other possible drivers of costs, such as technology usage, aging populations and number of care providers (doctors and nurses) per capita.  None explained higher health care prices in the U.S.

Countries like Germany and Switzerland had lower costs despite having significantly more doctors, more frequent and longer hospital visits, and more acute care beds per capita. Countries like Japan utilized technology more than the US, and countries like Belgium, Greece, and Italy all had older populations. Despite all of these countries facing cost drivers that were more severe than in the US, none of them came close to matching the United States’ total costs for medical care.

So with some of the usual assumptions about what causes high costs seemingly debunked (or at least contextualized),  Reinhardt looked at comparing how much Americans invested into the system and compared it with the amount of services they received. Overall, the researchers concluded that because of the fragmented nature of  private health plans and the way they individually negotiate with providers, this made establishing consistent and fair prices with providers more difficult. The result is provider groups being able to charge what they please and the health plans offsetting the costs by increasing premiums and deductibles for consumers.  Additionally, the researchers found that the American health system is pretty inefficient at processing claims and coordinating care to eliminate redundant services, further adding to costs.

Reinhardt’s research laid a good foundation for examining healthcare costs not just at a national level, but on the state and regional levels as well. He examined differences in the average prices in OECD countries, but didn’t examine the massive cost differences between states and between localities. In a forthcoming article, we’ll look at Minnesota’s astounding variability in pricing, and the effect it has on total costs. What we will find is above all else, what remains the issue in Minnesota’s health care? It’s the prices, stupid.

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