Americans Subsidize the World’s Medical Costs – Fair?

by Darwin on October 14, 2012

The United States has the most expensive health care in the world. In 2010, the combined cost of public and private spending on medical care came to $8,233 per person in the United States.

Putting the high price of medical spending in terms of GDP gives a true comparison. In the United States, 18.2% of the GDP is dedicated to health care. Runners up Switzerland and France spend only 12.3% and 12% of their GDP, respectively.

Why is American health care so expensive?

Some would argue the costs are the result of profit motive. American hospitals, insurance companies, and health care providers are private. The rest of the world has socialized their health care, cutting out the middlemen and reducing costs.

But how much of these savings can be attributed to the socialization of health care services? Very little. In fact, the high cost of medical care in the United States can be directly tied to the low cost of health care around the world.

Take a look at these charts, which show the cost of popular prescriptions in the United States vs. the world:

In the best case scenario, Americans pay twice as much for popular prescription drugs. In the worst case, we pay five times more. Prescription drugs are not the only medical goods where this cost disparity exists. Prices in the United States are always higher for any medical good than in any other global market.

How the World Screws the US on Health Care

The key difference between American medical care and the medical care in foreign countries is not profit motive. It is not a public or private model, nor is it the role of health care insurance companies. The sole difference between American health care and health care around the world is the role of government in setting prices.

In other countries governments negotiate prices for every medical good from hospital beds to prescription drugs. They lowball on prices, paying for only part of the true cost of research and development. Americans then pay for the remainder.

Americans have an effective agreement with the rest of the world to “split the bill.” After prices have been shopped and negotiated overseas, Americans get their much higher price. Whatever medical companies give up overseas they make up in the United States, where there are no price ceilings, and where there are no negotiations over medical prices.

In short, the world consumes the same steak dinner that we do, but they pay a hamburger price. Americans pay for the full cost of their steak dinners, plus extra to cover everyone else’s dinner.

America Should Play Hardball

The Affordable Care Act does not get to the root of the problem. It takes already high prices and spreads them around, doing nothing to actually make American health care less expensive. It makes health care less expensive for some Americans by transferring the burden to other Americans.

Moving costs around makes health care less expensive for some people, not everyone. Why not try to lower costs for everyone? Here’s a simple start: let’s play hardball. As Americans who have overpaid for health care for decades, we should start undercutting the rest of the world.

Why should Americans pay more so Canadians, the Swiss, and the French can pay less? Why do we, as Americans, insist on making Americans pay more so that we can continue to subsidize the rest of the world?

 

Does anyone else think we should ask the rest of the world to pay its fair share?

{ 15 comments… read them below or add one }

krantcents October 14, 2012 at 8:30 pm

Why don’t we adopt some of the good practices of other countries in our medical system. If you have insurance and go to a provider who contracts with your insurance company, the provider must accept the negotiated fee. This is also true of drugs, hospitals and services. If everyone would have insurance, everything would be less expensive. There is no incentive for young people to get insurance.

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JT October 15, 2012 at 11:35 am

Do health insurance companies have an incentive to keep costs low? One would think that since they’re compensated as part of a spread between the real cost of medical care and premiums that they would like higher health care costs.

The more we spend, the better, it seems. Luckily for health insurers, medical companies seem to be quite happy dumping the bulk of their costs off on the US.

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101 Centavos October 14, 2012 at 10:14 pm

The high cost of R&D is certainly a factor, but it’s not the whole story. State-run health care in Europe is below US standards. General health also tends to be poorer in the US, driving up care costs.

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JT October 15, 2012 at 11:33 am

I’ve seen studies making the case on quality and differences in health. I’m sure that explains some of the difference in the percentage of GDP we spend on health in the United States. However, I’m not sure why Americans should pay far more for the same services on an apples to apples basis.

Why should we pay $100+ for prescriptions that are <$40 elsewhere? That's all kinds of ridiculous, don't you think?

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101 Centavos October 15, 2012 at 9:40 pm

On prescriptions drugs, not much argument there. For that matter, why aren’t we in the US allowed to purchase antibiotics without a permission slip from a doctor?

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JT October 16, 2012 at 2:19 am

When you figure that one out, let me know. I’ve wondered that for a very, very long time.

When I took a controlled substance delivered as a prescription, I often thought there had to be a better way of distributing it than requiring $120 doctor’s visits for a check of my heartbeat and blood pressure every 3 months. If I were to start a for-profit medical center, I’d focus on users of these kind of drugs. I saw the doctor for no more than 3 minutes and the nurse for no more than 5 minutes. All-in we’re talking $120 in revenues for 8 minutes of facetime with people who surely are not making anywhere near $900 an hour. Overhead couldn’t be much – you could do what they did out of your garage if you wanted to.

Fortunately or unfortunately, we’ve concluded that our medical services have to be delivered by someone who is woefully over-educated for 90% of what they do.

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Adam Hathaway October 15, 2012 at 5:15 pm

I had no idea we funded lower costs for the rest of the world. To me that is crazy! I guess it is laughable when countries like Canada brag about their lower costs of healthcare.

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Darwin October 15, 2012 at 9:08 pm

So, the healthcare situation is pretty complex and can’t be boiled down to individual issues. To shed some light on some points raised herein, consider the following:

- Is the US subsidizing a Ford sold in China like the example here with drugs? After all, Ford sells the same model overseas for less than what it sells it for in the US. Same with software, same with Coke and just about everything else. For some reason, this logic of the US subsidizing the world always seems to focus on drugs, but people exclude just about every other good and service traded globally.

- Innovation: most innovation in healthcare happens in the US. The vast majority of all the market cap of drug, device, diagnostics and virtually all other medical innovation stems from the US. That’s not to say Israel, Europe, Japan and a few other select nations don’t have discoveries. But they have a US headquarters with research here as well. It’s no coincidence that we have the highest GDP and hence, the largest spend on healthcare; we do benefit from the innovation borne by profit margins that are able to support reinvestment in R&D.

- I’d be interested to see the drug prices normalized for per capita GDP. Also, rather than putting highest US drug price on there, show the normalized per capita GDP for lowest cost drug across nations; probably wouldn’t look as skewed.

At the end of the day, people have to be careful what they ask for. Virtually every great drug ever discovered is already available now as a generic at 10% of the fully costed brand name price. That’s how the drug patent system works. After spending years in clinical trials and the approval process (while the 17 year clock is ticking) and about $1 Billion in total costs for a sizeable drug program, an innovator company enjoys probably 7-10 years on the market covered by a patent. If we want a continuing pipeline of new drugs even better than the last, there needs to be a profit motive, else capital flows elsewhere.

If you want to see drugs at cost worldwide, well, say bye-bye to innovation and live with today’s therapies forever. We can’t have our cake and eat it too.

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JT October 16, 2012 at 1:53 am

Absolutely every product is subsidized by developed nations for emerging markets, but it’s only in medicine and medical goods that the US subsidizes other developed nations. Software and Coca-Cola isn’t cheaper in Australia, Canada, France, etc. than it is in the United States. Medical goods and prescriptions are, and not by some negligible amount.

I completely recognize the fact that innovation comes only because someone is willing to pay. That someone is Americans. There’s no way to destroy profit motive and get innovation. But that’s no reason to accept the status quo that Americans pay for the health care of Australians, the English, Canadians, etc., who can more than afford to pay for their “fair share” of health care, but who instead choose to pass it on to Americans by enforcing strict prices. We could very well enforce strict pricing too, and force every other country to step up on their own regulated prices.

If anything, I’m not suggesting that we cut off drug companies; rather, we demand that other developed countries pony up and pay for their portion of the costs by setting our own limits. All of these countries in the charts above with the exception of Spain can afford to pay up.

I don’t want to see drugs at cost across the world. I just don’t think it’s smart of us not to negotiate for lower prices when every other nation does. That’s a poor strategic move that guarantees Americans cover the burden for nations that are more than capable of paying more. I’m not convinced that other countries won’t pay up if we say we’re done covering their shortfall. It is health care, after all – you have to have it.

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PK October 16, 2012 at 12:02 pm

Awesome, absolutely agree – did you listen to the piece I did on Joe’s podcast about monopsony purchasing power and the effects universal medicine would have on the world economy? R&D is a huge issue – drug companies will sell close to cost in other countries, but ‘cost’ means after they have done the R&D necessary to bring a drug to market.

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Rob October 17, 2012 at 11:29 am

Dear JT,
There are so many incorrect and uninformed statements in your initial article that it is hardly deserving of a response, nevertheless, I will attempt a short one…
Name the place, the participants and the date on which the said agreement to ‘subsidize the rest of the world’s health care costs’ has been made
You brazenly state that all countries have state run health facilities or words to that effect: nothing could be further from the truth, there are almost as many variations as other countries out there. A good case in point, Switzerland where there is not a single state insurance company, rather a number of private companies providing both compulsory basic health and accident insurance as well as elective supplementary insurance. Furthermore, every health care giving institution in the country acts as a business and competes for people’s custom.
Do you really believe that all the big multinational companies operating in the health care area are subsidizing anybody? Do you not understand that cost and price are very different concepts and that every single company functions on the base of pricing made according to ‘what the market can bear’? There might also be a legitimate case of economies of scale being realized.
What do you make of the atrocious liability and tort system in the USA that increases costs manifolds for all participants in the chain? I am surprised this major cause for a cost and price differential did not even rate a mention in your article.
In view of the above, I suggest you stick to what you know or spend some effort into doing some research before publishing a piece that might appeal to some people’s ill placed patriotic instincts, but will not do much to shed light on such a complex subject.
Let me finish by quoting you ‘Absolutely every product is subsidized by developed nations for emerging markets’ Really? do you really know the meaning of the word subsidized? If you mean sold at a lower price, then we agree. Do you not know that ‘dumping’ is forbidden and sales under cost is a totally unacceptable practice prohibited by most countries as ‘predatory’? keep repeating this mantra ‘what the market can bear’… not subsidy!

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JT October 17, 2012 at 1:39 pm

There is no time and place. Just think about the way the process works. It’s simple game theory. If every other buyer of health care negotiates a lower rate, and we do not, then naturally we “subsidize” the cost of the rest of the world’s health care. Our medical insurance companies have virtually zero incentive to negotiate for lower costs since 1) Americans have to consume medical services and 2) gross profit margins for insurance companies are now capped at 20%.

Switzerland does not have state-run medical care. Switzerland does negotiate for drug/medical device products as a nation. There are price controls.

Most people are aware of malpractice and legal costs. It’s on TV 24/7 when health care becomes a major issue. Never is there discussion about the fact that Americans pay multiples that of other developed world nations for medical devices and pharmaceuticals. The only time this issue actually comes up is when politicians talk about importing drugs from Canada as if there is some reason that drugs that flow through Canada are inherently cheaper. Prices are controlled by different levels of the Canadian government. The same isn’t true in the United States.

Please point to where you think these countries are finding economies of scale that would explain such a large price differential. Speaking of economies of scale, the US consumes more pharmaceuticals by volume per capita than other nations, developed or emerging.

I know what subsidizing means. I’m not that stuck on semantics – would you prefer that I said “Americans displace the cost of the world’s medical care?” Really, who cares? Either way, Americans pay out the nose because other countries do not.

Saying its merely an issue of “what the market can bear” is ridiculous. Australia isn’t hurting, why do they pay so much less for the same drug. Drug costs are negotiated and effectively price controlled by the Australian government. The market in all the developed world nations above COULD bear far more, but they do not. Why? Because they set price controls and allow the excess to flow into American markets.

I’m not playing into people’s patriotic instincts. There is simply no reason why drug prices should be so vastly different from one developed world nation to another. If I wanted to play into people’s patriotic instincts, I would have said something about how medical costs are killing job growth in this country. Why hire Americans and pay their medical expenses when you can hire people overseas and let Americans “subsidize” (I know how much you like that word) your new workers’ costs of living? This is a good question, actually. Why hire Americans who need a much higher wage to cover basic costs when you can hire people overseas, whose basic costs are lower in part because Americans “subsidize” their expenses? That’s patriotic fluff, but a good question, really.

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Rob October 17, 2012 at 5:27 pm

Hi again JT,
I think this is not an issue of semantics. Your whole point seems to be that the rest of the world is paying prices that are ‘subsidized’. Here is the definition of subsidized in Thesaurus: “sustained or maintained by aid”. In other words ‘below cost’.
Here is where you seem to part company with common sense. What is the incentive of multinational companies to subsidize anything at all? Have you looked at the bottom line of many of the foreign pharmaceutical companies with worldwide operations which derive only a part of their income from the USA: Novartis, Roche, GSK, Bristol Myers, Sanofi etc.? What do you see there? Do you believe that most of their research, let alone all of it takes place in the USA? If this is not so, how do they magically transfer costs here?
Do you also believe that to a man the pharmaceutical companies go hat in hand to the governments and meekly take their diktats about pricing for their products? seriously? even those countries that have no clout and no size and therefore no conceivable possibility to impose their will on these giant companies?
I have worked for several multinational companies operating in different fields for more than 30 years, many of them in third world countries. I therefore consider myself well qualified to call your following statement malarkey: ‘Absolutely every product is subsidized by developed nations for emerging markets’. In my past experience, when setting prices for any product or service, the time honored principle of ‘what the market can bear’ has been put in practice. This does not address only the economic capability of the customer to pay your price, it also involves their willingness or lack thereof to do so, the lack or abundance of options as provided by competitors, the legislative background, the marketing considerations etc.
By now I hope you realize how simplistic your whole thesis is, how dangerous and easily discounted some of your arguments are, particularly the all encompassing statements such as the one I mention above.

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PK October 18, 2012 at 1:50 am

Rob,

I don’t know what thesaurus you are using to look up definitions, but if you enter ‘subsidize’ into Google (let me do that for you now) here’s what comes up:

1. Support (an organization or activity) financially.
2. Pay part of the cost of producing (something) to reduce prices for the buyer.

It says nothing about ‘below cost’. For a simple example, in many years farming is a lucrative activity… yet the U.S. Government still subsidizes farmers.

Now, obviously, J.T. doesn’t mean that we are entering into a transaction with the goal to lower costs for other first world countries – he is saying that our system of medicine and medical research has the same effect that an explicit subsidy would. It’s the same thing at the gym – the New Years Resolution crowd subsidizes the people who come on a regular basis, since the cost/visit is much less for people who continue to attend past January. Or, to get political, how the strong United States military envelope subsidized social programs in Western Europe.

Back to medicine. I assume that while you worked in medicine you learned that in some countries, present country included, there is a free market in medicine. In others, there is a single buyer who negotiates – a so-called ‘monopsony’, represented by the government. The Government negotiates drug costs directly, even though there might be 1,000,000 patients (who want the drug) represented in the negotiation.

Let’s say that RobCo develops a new drug, called Malarkey. Now, you have to jump through a ton of hoops in America – R&D costs, Clinical Trials, FDA approval. Let’s pretend, for the sake of argument, that costs you $100,000,000. Great, good work, that’s done now! Let’s go to the factory now.

RobCo discovers that it costs them 2 cents a pill to produce Malarkey. Okay, that’s great – so how does that affect pricing worldwide?

In America, as you stated, you toss it out into the market. Let’s say people pay $100 a pill; it’s a real blockbuster! That’s great – you are making $99.98 a pill, which is going a long way to paying back that fat debt you accumulated.

In Other Countries, the government makes the rules. So the Canadian Board of Medicine says, “Hey, RobCo, I see that you are producing these for 2 cents a pill. We have decided to pay you 3 cents a pill. Take it or leave it!”

Now, you could say ‘screw you, Canada!’, but that wouldn’t be a good move. You see, you already have 58 other drugs selling in Canada – and the political blowback from denying the Canadians your Malarkey would be tremendous! So you grudgingly take the deal, and give the Canadians your Malarkey. Congratulations again – you’re making 1 cent a pill in Canada! (And smart consumers are shipping drugs south, like this commenter has been known to do!)

You see what happened there? The production cost of your Malarkey is being covered by a small profit in other countries, but R&D, trials, and the whole mess aren’t being sufficiently valued. That’s right… the United States consumers, the people paying $100 a pill, are the ones who paid the majority of the R&D costs!

By the way, those economics would equally apply to any product Governments decided to monopsonize. Computers, TVs, Gym Memberships – they would all be, in effect, subsidized by the last ones into the pool. On health? That’s (the) US. That’s also why we’ll eventually move to a similar scheme, and, mark my words, there will be a lot of indigestion about the slowed pace of innovation (and a bunch of malarkey about how to fix it – including upping research grants).

Your pal,
-PK

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Ron February 26, 2013 at 5:11 pm

I’ve suspected this for years, but this is the first time I have seen it in ‘print’. Why aren’t government-negotiated prices, which are really price controls, considered like subsidies under free trade agreements? Do the drug companies and medical device manufacturers benefit by having this regime in place or are they powerless to resist price controls outside the US?

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