• What makes the US health care system so expensive – Investment in Health

    If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces is going to discuss one of the components of unexpected spending that accounts for why our system is so expensive.

    Remember, these posts are going to follow a common theme.  I am going to highlight how the United States is spending more than you’d expect given our wealth.  Much of this comes from the McKinsey & Company study, Accounting for the cost of health care in the United States.

    Investment in health is made of three categories: (1) prevention and public health, (2) public investment in research and development, and (3) investment in medical facilities.  It may surprise you (it certainly did me), that the United States spends a surprising amount in this category – $144 billion in 2006.  Still more surprising is that this is more than you would expect given out wealth, $50 billion more than you would expect.

    In the first category, prevention and public health, the US spent $59 billion in 2006, $27 billion more than you’d expect given its wealth.  Most of that was spent by states ($49 billion) for community health centers, tobacco prevention, and public health departments.  The remaining $10 billion, spent by the federal government, mostly goes to the CDC and FDA.

    In 2006, the US spent $42 billion in public funds on research and development.  Most of that ($28 billion) went to the NIH.  This does not include private investment by corporations, like pharma.

    While the total amount we spend on research is actually $16 billion more than you’d expect given out wealth, and it’s hard for me to argue that more money for research is a bad thing, there are reasons to suspect the extra money isn’t being spent wisely.  The McKinsey report notes that spending often does not align with disease prevalence:

    There’s nothing that says that spending has to align with disease prevalence.  There are reasons it might not.  Perhaps we might want to align spending in terms of cost-effectiveness.  Perhaps we want to align spending to knock off easy targets first.  Unfortunately, it doesn’t appear that we choose our research spending in an easily understood fashion.

    The final source of investment in 2006, that in medical facilities, was $44 billion, or $7 billion more than you’d expect given wealth in the US.  Most of that money ($36 billion) was spent by private industry, and more than two-thirds of that was to build new hospitals or extend older ones.

    Investment spending is not straightforward.  Yes, we spend more on average than other countries.  But we’re not necessarily spending it wisely. Our investment money isn’t directed where it might do the most good.  Our national investment in public health is shockingly low.  And is increasing our hospital capacity and number really a good idea given the fact that it’s likely increasing our spending on inpatient care?  The knee jerk reaction will be to cut this spending on public health or investment in research as we might in other categories, but that may do more harm than good.

    By now, you couldn’t really still be expecting easy answers, were you?

    I will say this at the end of every one of these pieces.  None of this proves that this money is wasted or fraudently taken.  Nor am I saying that we shouldn’t spend more money than other countries.   But this is money that goes above what you’d expect us to spend based on our greater wealth.  We should at least be able to account for and explain this increased spending in some way.

    • Dr. Carroll,
      I have to say your observation of research money being spent in an unorthodox fashion is right on. I work in the medical research field and have seen the fruits of poorly spent funding in the empty new labs and dead end projects funded again and again mostly at the hands of the NIH. My theory, and that of my co-workers and supervisors, is that funding is handed out via the good ol boy network. When new funding list come in for our institution I am always reminded of what my Dad always told me “It’s not what you know, but who you know.”
      Also certain areas of research are handcuffed by social views. For instance most money for tobacco research comes from the tobacco companies themselves. This is caused by, what I believe , a feeling of those affected brought it upon themselves and public moneys shouldn’t be used for them. However, lung cancer is in the top 5 causes of death annually. Also, an interesting little note, if a researcher, and sometimes even an institution, accept money from tobacco companies they are then disqualified from receiving grants from the American Heart and Lung Institutes.
      I take great pride in my work and I think that the U.S. should be leading the world in research. However the way we distribute our funds is in need of a massive reconstruction. I think the accountability is lacking and our focus needs to shift from the names that have been in the game for too long to the people who are willing to try something that doesn’t fit the paradigm.

    • Of all the areas where a non-linear response to wealth would be warranted, research is probably the best case. I would argue that other wealthy nations may be underspending on research, and we are probably underestimating what we spend on research anyway, because many of our research dollars are actually be wrapped up in the premium we pay for expensive drugs (all that regulatory approval stuff keeps everyone safe, and we pay for it when we buy the IP included with each new pill).

      Anyway, if we were merely overpaying for research rather than also shifting costs between healthy living/good food/reduced traffic volumes and medical care, we wouldn’t be having this discussion.

    • AIDS research can be justified for its worldwide benefit rather than its US benefit, although I guess that ratio would still be high even if US prevalence was replaced by worldwide prevalence.

      On a separate note, the Orphan Drug Act is an example of a policy that is explicitly opposed to aligning funding with prevalence.

    • Aaron,

      Both this and your quality series are really informative. Thanks for putting them together.

      I was wondering about costs for medical devices: Are they lumped in with facilities costs, or something else?

      I’m amazed at the write up on medical equipment. For example, you can buy a single dermabond applicator at amazon for $17 or you can buy its isomer, super glue, for $0.79! I’m sure dermabond is less abrasive to the skin, but enough so to justify a %1700 write up? I found a site selling bronchoscopes for as much as $12k! I have a hard time imagining that the manufacturing cost is even half that. I’m sure there’s thousands more examples of this.

      Now, I’m sure medical devices aren’t a huge contributor, but If you didn’t already incorporate them into one of the other categories, I wonder if they would be comparable to pharmaceuticals or be insignificant blip on the graph.


    • Nevermind. I found my answer in the underspending section. Go figure.

    • Also worth considering is that AIDS affects younger people, so in terms of life years extended it makes sense to spend more.

    • It’s not quite consistent to say that are spending on prevention and public health is much higher than expected, and then say it is shockingly low. Clarification? My understanding is that a big factor in other countries healthcare costs being lower is that they do devote a lot to prevention and public health, but maybe through channels that are not addressed here?