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The

Economist
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J
Thehealthofnations
Asurveyofhealth-carefinance1JuLy17th2004
'004
The health of nations
3
Also in tfris section
No reverse gear
Why (Osts onLy ever go up. Page 5
Anatomy Lesson
How health-careservicesarefinanced.
Page 7
MoneyweLL spent?
Itdependsonhowyoudothesums. Page8
Wasting disease
A tale of poor quaLity and inefficiency.
Page9
Treating the symptoms
Effortstecontain health-care(Ostsseem
doomedtafaiLure. Page14
New remedies
Theremustbeabetterway.Page15
Keep taking the medidne
Reformwillbeslowanddifficult,butthereis
noaLternative.Page17
,
Alist of sources be round online
Economl$t.tom/surveys
audio interview witMtheJuthar ilal
Economl$t,com!.udiO
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Health careconsumesalargeand growing chunkofrich countries'
incarne, butdoesitprovidevaluefor money? PauLWaLlaceinvestigates
H
IS tinancial empire made him the 1narioinwhichacontinuingcastexplosion
equal of kings, his fortune was the opensthedoorforagovernmenttakeover
envyofthemerelyrich,Butinthesummer ofemployer-financedhealthcareafterthe
of1836, NathanRothschild wasdying of 2008 pIesidentialelection.
an abscess leading to blood-poisoning, That would move America's mixed-
andailhiswealthwas10noavaiLToday,a funding arrangements- which leave 44111
dose of antibiotics, costing a few coins, people without health-care caver- doser
would havesavedthe59-year-oldbanker. tothe Canadi anmode!,in whichtaxesfi-
What would hehavebeenwill ing ta pay nancethefree useofhospitalsanddoctoIs
forIhatprescription? forail.Yetl'venCanadianshave beenlos-
To the seriouslysick,effective medical ingfaithinasystemthatwasonceasource
care is priceless. !Lut not everyone who ofnationalpride.ln1988,sorne60%ofCa-
ta the doctor is gravely i1\, ' norisi ll- nadians thought their health system
health care effective. Yet someone ha-sto worked weil, but by 2002 only 20% di d,
1
fotthebill,whetherornotthehealthcare anda big majority thought thata funda-
worksori5 reallyneeded.lndividuals'de- mentalshake-upwasneeded.Healthcare
mand for medical care is potentially wasthebiggestissueintherecentgeneral
boundless,butthecollective systemsthat e1ection.
fundmosthealthcarl'mustimposelimits. Several European countIies finance
That contradiction is a growing problem health care mainly through compulsory
for richcountriesascostsspiralupwards. contributions from employers and em
ln America, publicly financed health ployees.This social-insurancemodel,pio-
care goes mainly to the ol d andthe poor;lneeredin Germanyby OttovonBismarck
mostAmericanworkersandtheirfamilies in 188),hSprOvd-vulnerable to a corn-
are insured privately through their em- bm at ionofrisi nghealth-care costs and a
ployers. B_utafterawelcomeperiodohe- shortfall in contributions resulting From
1
stTai nt duringmuchofthe1990S,the cast high unemployment.But reforms in Ger-
of thcse employer-funded benefits has manyandFrance tatIyto reducethedefi-
beenrisingatdouble-digitrat esinthepast cilShaveprovedunpopular.
fewyears.AlainEnthoven,ahealthecono- Pressuresonnationalbudgets are also
mist at Stanford Universi ty whohas pio- causing international tensions, particu-
r neeredcostcontrolstrategies,paintsasce- ladyoverthepricing ofpharmaceuticals,
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which are consuminga growingshareof
the total healthcare bilL Prescripti on
drugsaregenerallymuchmoreexpensive
intheUnitedStatesIhaninCanadaorEu'
rope, where govemment-dominated
health-caresystemsareabletoextraclbig-
ger discounls. Tommy Thompson, the
American health secrelary. says Ihis
meanshiscountryisshoulderingmuchof
the cost of pharmaceulical research. and
hasaskedtheEuropeans10paymore.
Medicaltithe
Already,health-care spending onaverage
swallowsupnearlyateothofGDPinrich
countries, and Ihat proportion is rising
steadily (see chart. Loamingahead are
funher expenses as the post-war baby-
evidencethatseriousandextensivequal-
ity problems exist through American
medicine, resulting in harm to many
Ameticans". nIe blunt conclusion: "The
costs of waste, poor quality and ineffi-
ciencyareenormous."
Evidencefromothercoumriessuggests
Ihattheysufferfromsimil arproblems.The
medcalsectorhasbeenslow10 inves! in
information lechnology, which holds
1
great potential to reduce errors and im'
proveefficiencyandquality. Healt hcareis
poorlyco-ordinated,whichisa panicular
drawbackfor the growingnumberofpa-
tients with chronie conditions requiring
sustained ratherthanoccasional medical
care. Effective Integration ofservices pro-
videdbyprimary-earephysiciansandhos
boomersget aiderand are likely to neecl pitalsisstillailtaorare.
more healt h care. In America, long-teTm 1 Alithissuggeststhatthesystemreflects
proj ect ions by the Congressional Budgel
Officeindicalea sleepriseinfederal -gov-
ernmentspendingonhealthcarefortheel -
derly through Medicare. In 2003, Ihis ac-
counled fOI 1.4% of GDP, hut the CBO'S
centralforecasl showsil risingto8.3% by
2050, partly because under new legisla-
tianMedlcare willhavetapick upa size-
able chunk of the cost of prescription
drugsforaiderpeopLefrom2006.
lookingonthebrightside,thereisnow
much dearer evjdence that medicalcare
paysoffinhealthierandlongerlives.Thal
lnk was once queslioned- Mr Roth-
schild's experience notwithstanding- be-
causeinternational compari sonsshowed
no dear relationship hetween the re-
sourcesdevotedtomedicalspendingand
measures such as life expectancy. But
moredetailedresearchintospecificcondi-
tions such as cardiovascular disease has
established that the benefits of medical
treatment may handsomely exceed costs.
william Nordhaus, an economist at Yale
University,hasestimatedthatthewelfare
gainsfromhi gherlifee.xpectancyinAmer-
Icain thesecondhalfofthe10thcentury
matched those (rom higher con-
sumer spending on things other ,han
{
health.
Does this, then, provide a licence 10

cure at almost any price? Hardly. Along


withtheresearchestablisrungthebenefits
frommedicaltreatmenthascomeotherTe
searchshowingupthewaste,inefficiency'
and.g_oorquality....cl.riiUcnnelthclif-:-Re-
ports published by America'sInstitut e of
Medici ne have documented a distress-
inglyhigh rateofmedicalerrorsinhospi -
lais, whichmaycauseasmanyas98,000
dealhsayear-farmorethanthasecaused
by road accidents. There was"abundant
the priorities of provi aers- doclors and
hospitals-rather Ihan conswners, and
thall hereisplemyofscopetopuSh fora
beller bargain from the huge amountof
money now spent on medical care. The
cenlral goal for policymakers in the de-
velopedworld,saysthe OECD ina recent f
1Dear Lite a
li edth ofGDP, lOO2
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report, ''Towards Hi gh-Performing Health
Systems", is taraise efficiency andtaget
morevalueformoneyinmedi calcare.
Butthehealth-caresystemisresistantto
reform.Asimpleclampdownonexpendi'
ture-the usual strategy- contains- cast
pressuresfor awhite,but"t-hey
surface as the publi c clamours for more
money la remedy the shortcomings
causedbytherestraln!.Whethercastcon-
tainmemtakestheform ofbudgelcapsor
price control s. it leaves the struclure of
healthcare and Ihe underl ying powerof
providers intact. Empoweri ng the con
sumersofmedi cal careishardbecausesa
muchofitishoughtindirectlythroughin'
surance. Healt h-care insurerstypically Ie-
spondta increasedcompetitionbylrying
taselectthebestrisksratherthanby driv
ing downcosts among providers.:Gelling
consumerstapayabi ggershare"6fthecast
is likely ta make the healthcare market
work better. but there are limits ta the
amountofliskthat maslindividualscan
shoulder,andtotheirablil y10 bargainef-
fectivelywllhdoctorsandhospitals.
Thebesthopeforsuccessfulrefonnli es
inmakingileasierforheahh-careinsurers
and group purchasers to bear down on
providers direct ly. UntiL now, they have
been handicapped by a lack ofinforma-
tion aboui the quality of medicaL provi-
sion.Butthatisabouttochange,thanksta
a number of important initiatives ta set
outqualitystandardsandta measurethe
performance of doctors and hospitals
against[hem.
Thereis also plentyofscope to intro-
ducemorecompeti ti oninlotheprovision
of medical care. In Brilain, the govern-
ment-run Nat ional Health Service has
awardedcontractsforsorneroutineopera-
tions(suchashipreplacements)laforeign
heaLthcare groups. The volume of work
willinitiallybe quitesmall,butIheentry
of new providers has already adminis-
tered a salutary shock to a service long
shieldedfromeffectivecompetition.Simi'
larinnovationsarebeingmedelsewhere.
Forexample,Germanyistryingtadisman-
tl e Ihe barrier that has largely confined
hospilals10providingin' patientcare.
Thissurveywillexaminethecostpres-
sures in health care, mainl y in America
andEurope, and Ihe value as weil asthe
waste and inefficiency of much medical
spending, drawing on new research. On
Ihatevidence,health-careservicesneedla
be comprehensively re-engineered. The
surveysetsoutwhatrichcountriesaredo-
ingtaget abetterreturnonthehugesums
ofmoneybeingspentonmedicalcare.
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Noreversegear
Whycostsonlyevergoup
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aONal1erBrtain'sNHScameinlObe-
lngin1948,AneunnBevan,ilspolitical
founder,predktedt'hataniniiial surgeof
\ demand would subside as the service
caugh!upwiththebacklog.Ayearlalerhe
knew better: "1 shudder to think of the
ceaseless cascade of medicine which is
pauring down British throats at the
presentlime." ln1951, he resigned when
the Treasury imposed minor health-ser-
vice ChilIgeS. Already. rosts were Ihree
J
limeshigherthanoriginallyexpecled.
Thisepisode,when"thefirs! IhingIhat
happened was Ihatexpendilure look off
into the stratosphere and had to be sai
upon very firmly", was long etched into
the collective memory of senior health
andfinance officiais,saysJeremyHurst,a
healtheconomistatthe OECD. Formany
years,Britain imposedstrict controis that
helped keep ils COStS down rather more
successfullyIhanthoseinolherrichwun-
tries.YelpubliCdiscontentwithanincreas'
inglyricketyservicehasprompteda mas
sive boos! to reSOUIres under loday's
Labourgovernmenl SpendingontheNHS
isscheduledtoliseby ayearinreal
termsuntil2007-08. By then, total health
expendilureinBrilainwillhavevaultedto
9.4% ofGDP,comparedwith6.9% in1998,
theyearbeforethespendingspreestarted.
As ageneralIule, medicalspendingin
richcounlfiestendstorisefaSler lhanna
lional output. For examp!e, its average
shareofGDP inagroupof18 developed
economiesrosehom5-2%in1970la8.9%in
2001. Already, three countries- America,
Switzerland and Germany-spent more
than10%ofGDPonheahhcarein2002.ln
America,expenditurehasnowreachedal
mostlS%ofGDP,byfar thehigheslshare
anywhere, and the gap between it and
othercountrieshaswidenedoverthepast
three decades.ButIhi sdoesnotnecessar
ily reflec! Americanprofligacy:itcanalso
becausedby higherGDPgrowthinolher
counlries,asIreJand'sTecenlexperi encejJ-
lustrales. Health spending peT persan
there rose by 6.8%a year between 1990
and2000,comparedwith).0%in Amer-
ica. However,lreland'seconomygrew50
fastIhatthecountry'shealthspeodingasa
share ofGDP increased ooly minimally,
whereasin America il rose by more than
1Body-butldtng fi
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onepercenlagepointduringthatperiod.
Overthelongerterm,asPaulGinsbUlg
oftheCentrefor StudyingHealth System
ChangeinWashington,oc,poinlsout,the
increase in hca!th-carespendingperper-
san in otherinduSlrialised countries has
been Iemarkably similar to America' s.
Since1970,theaveragereal growthinrich
countriesoutsideAmericahasbeen4.0%a
year,comparedwith4.4%inAmerca.
Thissuggests a commoncause.Asur-
veyconductedbyVictorFuchsofStanford
,
_ 5
+
University in 1995 showed that most
heaith economists pointthe finger at ad-
vances in mediea! technology. Scientific
research eSlablishes the basis for expen-
sive new medical procedures (eg, trans-
plants), products (eg, magnetie-resonan
imaging scanners) and drugs. The Thfts
Cent refortheStudyofDrugDeveJopment
calculates that,takinginto account fai led
products,itnowcostsS900m10developa
new prescription drug. America usually
adopts new technologies firs!, but they
soonspreadtoothercounlries.
Overlime,thecastofmedicaltechnol -
ogiesdeclines,especiallywhenproperac-
count is laken of quali ly improvement5.
Expensive drugs prolecled by patent are
replacedbycheapgeneries.Surgiea!proce-
duresandmedicaldevicesfall in priee.sa
Ihecastperpatientdrops.Bullhisismore
Ihanoffset by theriseinthe demand for
5uch Irealments.,whiehpushesupexpen'
diturepeTpersan.
ln addition,the health-earesectot is la-
bour-intensive,saIhatthemoreitdoes,the
more people it needs,manyofwhomare
highly paid. In America, pay and other
benefits accoun! for over 60% ofhospital
running expenses.Many medical services
arehard10standardise,sathereislessscope
ta drive down costs through automation.
WilliamBaumol,aneconomistatNewYork
Universit y,hascharacterisedheaithcareas
"a handicraft industryn amicted by the
chronic"oostdiseaseofpersanalservis".
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Yet these explanationsare not wholly
convincing. Technology may be raising
cosls,butoolybecausethemarketisrcady
to pay for expensive innovations. New
medicaJtechnologiescouldinprinciplebe
directed towards cost-saving innovation.
Andwhyhasthesectarbeen50sluggishin
adoptinginformationtechnology,despite
ilspotentialforraisingefficiency?
National health systems in different
countriesappeardiverse, butail ofthem
areformsofinsuranceagainstunexpected

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medicalbills.Thismeansthatthebulkof
health care is paid for by third parties, 1Amountaintoavoid Il
whetherprivateinsurersorgovernments. usfederalspendinqas';'ofGDP
Medical technologies are developed for
andusedinamarketthatismuchlesssen-
sitive to budget constraints than individ-
ualconsumerswouldbe."Ifstheinterac'
tion ofhealth insurancewithinnovation
that'sdrivingthesystem,"saysDanaGold-
man, a health economist at the RAND
think-tankinLosAngeles.
In fuis thirdpany-payer market, doc-
tors play an ambivalent role: they both
supplymedicalcareanddemanditonbe-
halfoftheirpatients.Thiscancreale"sup-
,-._Fflr"rut __--/
plier-induced demand". Victor Fuchs
\.ou",.(o,"l,." ",,, 16coJ gotOtfi<o
draws an analogy with Ihe car market.
Suppose,hesays,cardealershadtocenify
whetheryouneeded a newcar, andyou veloped counlries the share will beeven
werenotpayingfor itdirectlyoutofyour higher,ofwhichmorebelow.
ownpocket:therewouldbea101morelux- 'flle link between age and health
urycarsaround. spending is Jess straighlforward than it
"The idea thal we have a classic com- mightseem.Il istruethatolderpeopleare
petitivemarketjustdoesn'tapplytohealth heavyconsumersofhealthcare:spending
care," says Alan Garber, director of the perpersonontheover-65sistlueeto four
Centrefor Health Policy al Stanford Uni- times higher than on younger adults.
versity. In sorne seClors, he points out, However,muchofIhishigherexpenditure
therearemonopolies,suchasdrugsunder isincurredinIhelasttwoyearsof li fe.This
patent;inothersIhereareoligopolies,such is also true of people who die younger,
ashospitals,whichfaceweakcompetition whichsuggeststhataspeoplelivelonger,
because mostmedical care is demanded costs will be deferred rather thanraised.
andprovidedlocally. RAND'S forecasting modelofhealth-care
Therecentresurgencein medicalcosts COSIS suggests that increasing longevityis
demonstrates the resilience of producer not in itself a big problem. "Ifyou keep
powerinthehealthcaremarket.lnAmer' people alive, in general you keep them
ica, hospilalspendinggrowth,whichwas alive in a relatively healthy state and it
helddowninthemid- tolate1990S,hasre- doesn',COSIalot,"saysMrGoldman.
bounded.Hospitals blamecost pressures
fromlabourshortagesandnewregulatory Thegimmegeneration
requirements; others say it reflects their On the other hand, baby'boomers are
marketpower,whichhasbeenaidedbya likely to be more expensive customers
wave of mergers. "There was enough than today's older generation. "They aIe
consolidation Ihey could tumroundand much more voracious consumers of
thumbtheir noses at the healthpurchas- healthcare,"saysMsDarli ng."Theyhavea
ers," says HelenDarling, presidentofthe different altitude,they wantto beable to
NationalBusinessGrouponHealth.Inthe fUn raceswhenthey're90.Ifsageneration
pharmaceuticalsector,nominalspending that says r can't run, fix my knee," says
on prescription drugs hasbeen rising by MarthaMarsh,thechiefexecutiveofStan-
over15% a year. In rich counlries,growth fordHospital.
in spending on pharmaceuticals has re- Official projections generally assume
cently beenconsiderablyfaster than thal thatcurrentage-related patternsofhealth
ofoveral\health-carespending. spending will continue in the future, 50
Withoul reforms to change the struc- they capture neitherofthese twopoten-
ture of health-care markets, expenditure tially offsetting effects. What theydocap-
looks set to carry on rising. And before tureis theimpactonhealthcostsfrom the
long costswillget anotherupwardnudge sheer number of ageing baby-boomers,
as the number of older people in rich whichtheOECDreckonswilladdtwopero
countries rises. From about 2010, the big centage points of GDP on average to
baby-boomgenerationbornafterthewar health-carespendingindevelopedecono-
willreachretirement.ThiswillpushupIhe miesby2050.Thisprojectionassumesthal
proportionofAmericansover65from12% health-care spending per elderly person
in20001020%by2030,Inmanyotherde- risesbroadlyinlinewilhlivingstandards. H

Thal. however, is not what has hap-
pened in the past. Sinee 1970, America's
Medicarecostspermemherhavelisenby
threepercentage pointsa yearfasterIhan
GDP per person. The CBO assumes Ihat
Ihismarginwillnarrowtoonepercentage
point, but still forecasts Ihat Medicare's
spendingasashareof GDPwillmoreIhan
trchleby2050.
Theforecas! allowsfortheeffeCl ofthe
new prescription-drug benefit for the el -
dcely, which starts in 2006. That benefit
hasanunusualdesign:thepatienlpaysthe
firs! $250 in a year,Medicale mOSI ofthe
nex! $2,000, the patient the subsequent
52,850,andthenMedicarepicksupalmost
all additional tosts. KentSmettersofthe
Wharton Schoat, who has drawn atten-
tion tothe long-Ierm imbalance in Medi-
Anatomylesson
R
ICHcountriesuseavarletyofways(0
payfOT heahhcare,butinalmostailof
themthemainsourceof moneyisthe
publicsector(seechart5).Onaverage
acrosstheOECDcountries,itaccounted
for72%ofhea1thexpenditurein2001.The
lowestsharewasinAmerica,wherepub-
licmoneyrepresentedonly45%oftOla1
healthspending.
Therearethreemainwaysoffunding
heahhcare:mostlylhroughlaxation,asin
Canada,BritainandSweden:mainly
nomcompulsorycontributionsmadeby
employersandworkers,asnGermany,
FranceandtheNelherlands;andwitha
largecontributionfromvolunwyprivale
insurance, of whichAmericaistheonly
example.Thisstreamoffundingis
dominatedbyemployers becausehea1th-
carebenefitsforemployeesareexempt
fromtaxes.Allowingforthevalueof Ihal
taxbreak,thegovernmentisestimated10
financenearly60%ofailheahhspending
inAmerica.
Privale sourcesofheallh-c3refina nce
areoUI-Q(-pocketpaymentsandinsur-
ance.lnCOnlTastloAmerica,inmost
counlriesprivateinsuranceprovidesad-
dilionalratherIhanprimarycaver.ln
Canada,itisused!OcaverthingsIikeden-
raJcareIhatarenotmetbypublicinsur-
ance.lnFrance,itisusedtomeet
oo'paymentsbyindividuals Ihat topup
care's finances, says: uWeve crealed Ihis
big doughnuihole. Do wereaUy thinkit
won't be filled? Ifit is, Medicare gets a
wholelotmoreexpensiveagain.H
Add in federal-government spending
onMedicaid,ajointprogrammerunwith
thestates,whichdirectsmoneytalow'in-
comegroups,includingtheelderly,andto'
talfederal budgetspendingonhealthcare
willsoarto11.5% ofGDP by2050,accord-
ing ta the CBO'S cellua! forecast. That
wouldrequireheftytaxrises.
ln Ewopean countries. increases in
health-carespendinghaverecentl y hel ped
to move national budgets from surplus
iotadeficit.lnBritain,thebigincreasesear-
markedforhealthhaveleft!ittleroom for
manyotherpublicspendingprogrammes.
Population ageing will be especially
1Who ispaytng? D
H"lltlt1p1!nding by$(Jureeoffunrlng, 2002, 't.
_ Public _ Otlterprivattfunds
Pri"ite _ Out-.of-podce-t
insu.ance Mmenti
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themainpaymenlSfromthepublicpro-
gramme.lnBritain,supplememarypriv-
ateinsuranceisoftenusedtajumplong
queuesforoperationsunderIheNational
HealthService.
Althoughhealthcareisfundedmainly
fromthepublicpurse.inmostoounlriesil
isdeliveredbyamixedeconomy.Doctors
workingintheprimarysectorareusually
self-employedorinprivatepractice.The
markedinEurope:the rati o ofpeopl e of
working age to those over 65 will halve,
from four to one now tatwo to one by
2050.With fewe rworken10 generate tax
revenues,furtherrisesin healthspending
coulddestabilisethepublicfinances.
Suchforecastsexplainwhyhealthbud-
gets have become a big wonyfor policy-
makers.whenthefinanceministersofthe
G7 leadingindustriali sed countries meet,
they usually talk about things like cur-
rell cymarketsoreconomicinstability.But
when they got together in May this year,
theyalsodiscussedheaJthspending.
11 is easy to see why endlessly rising
health costs should make finance minis-
tersshudder.Butifhigherhealthspending
resultsinhealthierandlongerlives..isIhat
notsomethingtocelebrate? _
Howhealth-careservices
arefinanced
publicsectorismostheavilyinvolvedin
runninghospitals,andinBritainilalso
exerfS strongcontroloverprimarycare
Ihroughilscontractwilhphysicians.By
contrast, inGermanyabouthalfofhospi '
talbedsareprivatelyrun, thoughmainly
notfor-profi t,andintheNetheIlands
morethan90%ofhospitalsareprivate
not-for'profitorganisations.
Paystructuresalsovarywidely.ln
A merica, doclorsarepaidonafee-
for-servicebasts.lnFrance,primary-care
physiciansarepaidthatwaybut doctors
inpublichospital sdrawasalary.lnBrit-
ain,hos pilaldoclorsaresaJariedandgen-
eralpract itioneIsareremuneratedmainly
throughamixtureof capitati onandper-
formancepayments.
lnmoslrichcountriesbathfinancing
andprovisionarebecomingmoremixed,
saysElizabet hDocteur,ahealthecono-
mistattheQECD.lnAmericathegovern-
menl'ssharcoffundingisrising,whereas
Germanyistryinglagelindividualsto
paymorefortheirhealthcare.Francehas
broadenedilspublicfina ncingbasetoin-
cJudetaxrevenuesasweilassocial-insur-
ancecontributions.lheBritish
governmenl,whilemaintainingilScom-
mitment10apubliclyfundedhealthser-
vice,isnowgivinggreaterautonomyto
publichospitalsandusingprivateprovd-
erstadomoreworkfortheNHS.
8A_oI __
TheEconoml stJuly17th 2004
.'
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!,HHUHE-
MoneyweLLspent?
Itdependson howyoudothesums
D
ESPITE the prodigious growlh in
heaJth-carespendingoverthepas!40
yeaTs, there have long becn nagging
doubtsoverwhetherilprovidedvaluefor
money. Medical advans sucb as vac
cines and antibiotics against infectious
diseases have dearly done much 10 im-
provepeople'shealth,hUIthesethingsare
relatively cheap. What has all lherest of
thespendingachieved?
AcommonlyusedgaugeofheaJthsta
tus is life expectancy.Thismeasure casls
doublontheeffectivenessofheavyspend-
iogonheaJthcareinIeeen!decadesonIwo
grounds.Fi.rst, the biggest increase inlife
expectancy pre-dated theintroduction of
nationalhealthcare systems. ln England
andWales,forexample,Iife expectancyal
birt hroseby20yearsinthefirsthalfofthe
20thcentury,butbyonlytenyearsinthe
second half. The most important reason
fortheearlygain wastheconquestofthe
infectiousdiseasesthatweretaking5ucha
heavy toll a century ago. But the biggest
improvement occurred before the intro'
duction of mass immunisation pro-
grammesandantibiotics.Ilisthoughtthat
merucalcareaccountsforonlyabout afifth
of the 20t h century gains in life expec-
tancy in Britain and America. The rest
came from improvements in nut rition,
sanitation,hygieneandhousing.
The secondreasonto doubt the value
ofhealthcarespendingemerges from in
ternationalcomparisons.Americaspends
easlythehighestproportionof itsGDPon
medical care, but its people's life expec
tancyatbirthislowerthaninmanycoun
mes with more modest health budgets
(seechan6).
Such comparisons are often used 10
criticise the American health-ca.re system
or 10 defend stingy medical budgets in
othercountries..Yelwhattheyreall yshow
is that health is a complex matler, with
merncalcarejusioneconui bUioryfactor.
Health can be seen as a capital good in
whjchindividualsinvestnotjusllhrough
spendi ng on medical care but through
theirown behaviour,forexamplebyeut
tingout smoking,overealing and binge
drinking. [jving condilionsand environ-
mentalfactorscanalsoaffectheahh.
Aninfluentialexponentofthisviewis
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Stanford University's Victor Fuchs. ln his
classic text, "w ho Shall liveT', first pub-
lishedin1974, hewrotethatdifferencesin
healtb levelsbetweenAmericaandother
developedcountries"arenotprimarilyre-
latedtodifferencesinthequantityorqual-
ityofmedicalcare,Rather,theyareattrib-
utable to genelic and environmental
factors and to personal behaviour." He
suggesledthat"higherincomeoftenseems
ta do as muchharmasgoodtohealt h, 50
Ihat diffe rencesin diet, smoking,exercise,
automobile driving and other
lionsof'Ufestyl e'haveemergedasthema
jar determinanlsofhealt h."
Untilrecently,mosthealtheoonomists
were sceptical about the contribut ion of
medical care to genetal health, says Ted
Frechof theUniversityof California,Santa
Barbara.Aformersceptichimself,henow
arguesIhateven allowingfortheeffectof
lifestyles,medicalcaredoesmakeadiffe r-
ence. Heis convinced aboutthe value of
drugs, especiall ythecholesterol-Iowering
statinsusedtocount ercardiovasculardi s-
ease. Hisanalysisof18advancedcount ri es
suggests Ihal pill-popping does work:
"Countri esIhalconsumed morepharma-
ceuticalssawtheirpopulat ionsli velonger
andsuifer less HI healt h than those that
consumedJess."
William Schwartzofthe Universityof
Southern California School of Medicine
stresses that medical care del ivers more
thanlongerlives.ltpaysanextradividend
byimprovingthequali tyofpeople'slives.
fOfexamplethroughgreatermobil il Y, en-
hanced vision and pain relief. He ilIgues
that thecostofsuch treatmentsaccounts
foraconsiderablepartofthespendinggap
betweenAmeri caandolhercountries.
At the sametime,the qualityoftreat-
menlShasimprovedbyleapsandbounds.
Newformsofsurgeryarelessinvasiveand
allow swifter recovery. New drug thera-
pies mean that pati ents receiv ng heart
transplants now spend only ten days at
Slanford Hospital, wheIeas 20 years aga
they often Slayed Iwomonths orlonger,
saysMsMarsh.Jac)(Triplett,aneconomist
altheBroo)(ingsInstitution,citescalarac!
$urgery asan example:"Atonetime you
hadtospendtendaysimmobilisedinin-
tensive care. Now ifs done as an outpa
tientappointment.sonotonlyhasquality
improvedbutilta)(esfarlesslime."
lnareceutbook,"YourMoneyorYour
Ufe", David Cutler, an economist at Har
vard University, offers sorne interesting
SUffiS on th.e value ofhealth care.For ex-
ample, an Amcrican aged 45 today will
live four'and-a-half years longer thanhe
wouldhavedonein1950becauseofade
cline in cardiovasculardisease.Mr Cutler
attribulestwo-thirdsofthi sincreaseinlife
expcctancytobettermedicalcareandthe
remaining third to behavioural changes,
such as givi ng upsmoking.Survi val rates
for low-birth-weightinfantshavealsoim-
proved greatl y because of medical
ment. Thcse are the two areas where
healthcarehasmadethebiggesldifference
tomortalityinthepasI50years.
What'slifeworthtoyou?
People puta high valueon livinglonger:
MrCuderestimatesthat anextra yearof
lifeisworth$100,000toanindividua!.On
thal basis, he reaches a starding conclu
sion:thatinAmerica benefits ofmed
cal advances for these IwO conditions
alone are equal to the entire increase in
medical rosIS in the past half-ntury."
,
This findi ng appears to overturn the con
vent ional wisdorn th at the val ue of medi
cal spending is questiona bl e, and to vindi
cate the vast sums poured into health care.
One difficulty with this kind of analysis
is that it does not compare like with like.
Costs are real: they have to be met out of
workers' incomes, whether through insur
ance premiums, cash paymenlS or taxes
and socialsecurity contributions. In con
trast, Ihe valuation of benefi ts is notionaL
nue, il is derived {rom solid evidence. such
as the amount o{ money people are pre
pared to pay for sa{ety features, eg, car air
bags, Ihat could save lives in a crash. But
Ihis prompts the question: why do 50
many people take so li ule care of them
selves even though it may COSI liltle or
Wastingdisease
nothing, whereas once they have become
ill medtcal intervention costs such a lot?
Yet this new research underlines an im
portant point: whatever the doubts about
the contribution of medi ci ne for much of
the past century, it is now doing much
more to push up Iife expectancy. Ahead
lies the prospect of even greater gai ns as
advances in the li fe sciences are translated
into innovat ive therapies. Potential Ireat
ments include targeted techni ques ta corn
bat cancer and tissue engineering to re
place fail ing organs. John Pons, former
research director of Massachusetts Gen
eral Hospital, says that further big in
creases in life expectancy are "within the
capaci ty of the sciemific knowledge base
and medical delivery system if you didn't
A tale of poor quality and inelficiency
"OURattempts to deliver today's
ledmologies with loday's medi cal
production capabili ties are the medi cal
equival ent of manu{acturing nti croproces
sors in a vacuwntube faclory. The costs of
waste, poor qualily and inefficiency are
enormous. I{ the current delivery system is
unable to utilise today's technologies ef
fectively, it will be even less able to carry
the weight of lomorrow's technologies
and an ageing population, raisi ng the spec
tre of even more variabili ly in quali ly,
more errors, less responsiveness and
greater costs associated with waste and
poor quality."
This in di ctment of America's health
care system cornes not from an angry blog
ger but from the prestigious Instit ute of
Medicine in a landmark report, "Crossing
the Quali ty Chasm". The result of years of
work by a conuniuee of experts, il isscat h
ing about the pOOl standards and waste
fulness that it found.
One manifest sign of poor quali ty is the
number of peopl e who die because of
rnedical errors. In an earlier report, the in
have toworry abou! toSts".
But costs should be less of a worry if
the gains in heal th are sc highly valued. Mr
Cutler has no difficulty in principJe with
projections in which healt h spending as a
share of the emnomy continues to grow
to, say, 30%. Such a fi gure may seem out
landi sh, but the currem share of 15%
would ilself have seemed absurd in 1960,
when America's total health expenditure
amounted to only 5" of G D P .
There are IWO major objections to the
idea that health care shoul d absorb an ever
rising share of national incarne. If Ihis
arose from privale choices subject to the
constraints of household budgets, ail weil
and good. But as Peter Zwei fel, a health
economi sl at Zurich University, poinlsout,
Ihis is a market in which governmenls in
tervene on a massive scale. Governments,
for their part, have ta worry about raisi ng
taxes, which may slow economic growth.
SecondJy, the overri ding objective for
policyrnakers, as Mr Fuchs insists, is to en
sure Ihat additiona! money put into health
generates commensurate additiona! gains.
Mr Goldman of RAND puts it Ibis way:
"The questi on is whether medical technol
agies are effective at the margi n. For exam
pte, there will be a d ass of people for
whom statins are cl early va!uable, but
should we put them in the water?" Mr Cut
1er himself is a ti erce critic of many waste
fui fealures of American heaJth care.
These worri es are given added weight
by a recent accumul ation of findings about
inefficiency and waste in medi cal care.
dearly, these problems need to be tackled
fi rst before writi ng a blank cheque for
health budgets. _
slit ute esti mat ed that such errors in Ameri
can hospitals were responsible for at leas!
44,000 deaths a year, and perbaps more
than twi te Ihal. Medication errots alone,
such as incorrect dosages, accounted for
7,000 deaths. Accordi ng 10 the institute,
health care was "a decade or more behind
other highrisk industri es in its attenti on to
ensUIi ng basic safety".
Not only can medical erroTS resuh in
human tragedi es, they also waste money
because of compensati on daims and the
addi tional spending needed to try to put ..