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U.S. health expenditure performance: an international comparison and data update.

Introduction

In this article, we examine expenditure trends and the economic performance of the health systems of the 24 Organization for Economic Cooperation and Development (OECD) countries with special emphasis on 6: Canada, France, Germany (the former Federal Republic of Germany), Japan, the United Kingdom, and the United States. Because current data on availability and use of services and health outcomes were recently analyzed (Schieber, Poullier, and Greenwald, 1991), we focus on health expenditure performance, emphasizing U.S. performance relative to that of other countries. First, recent revisions to the OECD data are discussed. Second, the various expenditure measures to be analyzed are described. Third, levels and trends are analyzed in the ratios of health care expenditures to gross domestic product (GDP), per capita health spending and GDP in U.S. dollars, and the public share of total health spending for the 24 OECD countries for 1980-90. Next, the expenditure performances of Canada, France, Germany, Japan, the United Kingdom, and the United States are analyzed on the basis of a range of different measures of health sector performance. Fifth, some concluding observations are made on the implications of the analysis for U.S. health care reform. The 36 tables of data contained in the appendix provide detailed information for the 1960-90 period for the 24 countries.

Recent data revisions

The OECD data base has been extensively described elsewhere, with the most recent revisions fully described in the OECD publication OECD Health Systems. Facts and Trends (Organization for Economic Cooperation and Development, 1992b; Schieber and Poullier, 1991). In addition to new data for 1990, the health expenditure series for Australia, Belgium, Canada, Iceland, Ireland, Italy, the Netherlands, Spain, and Sweden have been substantially revised.(1) In several other countries (including Denmark, Finland, France, Greece, and the United Kingdom), minor adjustments to the historical data have been made. More comprehensive information on Turkey has also been obtained.

Underlying economic data series have also been revised-most notably the GDP and GDP deflators for the United States. The generally upward revision of the U.S. GDP has resulted in a lowering of previously reported ratios of health expenditures to GDP for the United States by as much as 0.3 percentage points for the more recent years. (For example, based on the new GDP series, the U.S. ratio in 1990 is 12.1 percent instead of 12.4.) Similarly, the GDP series for Germany, Luxembourg, Spain, and the United Kingdom have been revised.

Another major and important revision concerns the purchasing power parities (PPPs), the rate used to convert different national currencies into one numeraire currency. The PPPs for all countries have been recalculated on the basis of a new 1990 survey, and the historical data have been revised.(2) Previous PPPs were based on a 1985 benchmark.

The population figures for a number of countries have also been revised. The censuses conducted in many countries in 1990 and 1991, including the United States, affect the per capita figures for the past decade as countries adjust population estimates based on these most recent census tabulations.

Expenditure performance measures

There are many ways to measure the expenditure performance of health systems (Schieber, 1990). Expenditure levels and rates of growth(3) Can be measured in each country's national currency or converted into one numeraire currency (e.g., U.S. dollars). Expenditures can be adjusted for population and inflation. Health expenditure levels and growth can be compared with the level and growth in the overall economy as measured by GDP, national income, or some other macroeconomic aggregate. Comparing expenditures in one numeraire currency is more problematic than comparisons in national currencies because of the assumptions and underlying data that go into the construction of purchasing power parities and the lack of reliable PPPs for health. Yet, as imperfect as they may be, PPPs are the best available measure for comparing absolute levels of health spending in one numeraire currency. Similarly, adjusting the health care spending of individual countries for health care inflation to obtain a measure of volume and intensity growth is also difficult because of methodological problems in developing appropriate medical care price deflators as well as a still-high degree of heterogeneity in medical care price deflators across countries.

The most widely used measure of health sector performance is the percentage of each country's total output devoted to the health sector, which we refer to in this article as the health-to-GDP ratio. Countries can be compared both at a point in time and over time. In temporal analyses of this ratio, it is important to analyze both components--the growth in health spending and the growth in GDP. As discussed later, much of the growth in the U.S. ratio relative to those in other countries is the result of much higher growth in U.S. health spending relative to U.S. GDP.

Some have argued that the health-to-GDP ratio is the most appropriate measure for cross-national comparisons, because the health sector functions within the general economy, and one would expect that countries with more rapidly growing economies would both purchase relatively more health care and generate increased health spending through increased real wage levels (Barer, Welch, and Antioch, 1991). Although this argument is generally valid, it does not obviate the need to look at other measures of health sector performance, such as increases in nominal and real per capita health spending in national currencies as well as absolute comparisons on the basis of one numeraire currency.

Although one would expect greater economic growth to result in greater health spending for the reasons previously stated, other factors (such as differential productivity of labor and capital in the health sector and a myriad of additional factors operative in an industry with significant aspects of market failure) suggest the need to use a range of measures in addition to simply monitoring the health-to-GDP ratio and its two component parts. For example, deflating health expenditures by the GDP deflator for each country provides a measure of the opportunity cost of resources going into the health sector. Similarly, if valid medical care input price indexes are available, deflating health expenditures by this measure provides information on the growth in volume and intensity of services in the health sector. Both of these measures provide additional useful information about health sector performance within individual countries and for international comparative purposes. Nevertheless, one must keep in mind that all these analyses are limited by fundamental methodological problems in measuring economic efficiency and health outcomes, as well as the sensitivity of the results to the time periods chosen.

It is difficult to put all these diverse measures into a simple conceptual framework. For the 24 OECD countries, only the health-to-GDP ratios, per capita health spending and GDP in U.S. dollars, and the public share of total health spending are analyzed here. For six of the major countries, a far more intensive analysis follows.

For these six, the health-to-GDP ratio, nominal health expenditures, and nominal GDP are analyzed to understand which factors are driving the health-to-GDP ratio. Second, nominal health expenditure growth in national currencies is analyzed in terms of a decomposition methodology, whereby nominal health expenditure growth is the product of population growth, increases in health care prices, and increases in the volume and intensity of services per person (Schieber and Poullier, 1989). Health care expenditure growth, health care price growth, and population growth can be measured from established statistical information, while volume and intensity growth is calculated as a residual factor. In other words, nominal health care expenditure growth is adjusted for population growth to get nominal per capita expenditures; nominal per capita expenditures are adjusted for health care inflation to get real per capita expenditures, which, in effect, represent the growth in volume and intensity of services (as well as any other factors not adequately accounted for by the price and population adjustments).

Within this framework, other performance measures can be analyzed. For example, health care price increases can be disaggregated into increases in overall prices times the amount by which health care prices exceed overall prices; this latter concept is referred to as "excess health care inflation." Another measure of policy interest derivable from these data is health expenditures per capita deflated by the GDP deflator. This provides a measure of the consumption and investment opportunities forgone in non-health sectors to accommodate health expenditure growth. In analyzing such opportunity costs, it is important to consider both the base year spending levels as well as the rate of growth. Thus, in the third part of this framework, absolute levels of health spending denominated in one numeraire currency are measured in order to contrast both base year and end year per capita health spending across countries. Similarly, given the strong relationship between health spending and GDP, it is important to analyze absolute levels and rates of growth in nominal and real per capita GDP as well as the absolute levels and rates of growth in per capita GDP in one numeraire currency.

Expenditure performance in 24 countries

Tables 1 through 4 contain information on the health-to-GDP ratios, the public share of total health spending, per capita health spending in U.S. dollars, and per capita GDP in U.S. dollars, respectively, for the 24 OECD countries for the period 1980-90. In 1980, the share of health in GDP averaged 7.0 percent for the OECD countries, ranging from 4.0 in Turkey to 9.4 in Sweden.(4) The United States and Ireland had the second-highest shares, at 9.2 percent. In 1990, the average had increased to 7.6 percent, but the range widened to 4.0 in Turkey to 12.1 in the United States. Most countries have stabilized their health-to-GDP ratios, as evinced by the fact that the average ratio has barely changed since 1983. The dispersion in the health-to-GDP ratio, as measured by the coefficient of variation (i.e., the standard deviation divided by the mean), has been relatively stable, 0. 19 in 1980 and 0. 20 in 1990. [TABULAR DATA 1 OMITTED]

The United States exhibits the largest absolute growth in its health-to-GDP ratio. The U.S. ratio has increased by 2.9 percentage points since 1980, compared with an average OECD increase of 0.6 percentage points. Iceland, which had the second-largest absolute increase, had an increase of 2.1 percentage points. The U.S. ratio grew at 2.7 percent a year (second only to Iceland), compared with an OECD average of 0.8-percent growth.

The public share of total health spending for 1980-90 (Table 2) has been fairly stable since the mid-1970s. In 1980, the public share ranged from 27 percent in Turkey to 98 percent in Norway, with an OECD average of 76 percent. The United States, with a ratio of 42 percent, was the second lowest. In 1990, the average ratio for the OECD was 74 percent, ranging from 36 percent in Turkey to 95 percent in Norway. Once again, the United States, at 42 percent, has the second-lowest ratio and is the only country other than Turkey with a ratio below 60 percent. The dispersion in public shares as measured by the coefficient of variation has been relatively stable, 0.20 in 1980, compared with 0. 18 in 1990. [TABULAR DATA 2 OMITTED]

In terms of absolute levels of 1980 per capita health spending converted to U.S. dollars using GDP PPPs, as shown in Table 3, average OECD health spending was $604, ranging from $67 in Turkey to $1,064 in the United States. By 1990, average OECD health spending had increased to $1,204, ranging from $132 in Turkey to $2,566 in the United States. Spending in U.S. dollars for the OECD countries increased during the past decade at an average annual rate of 7.1 percent, with growth rates ranging from 4.6 percent in Ireland to 9.2 percent in the United States. As with the other distributions, the dispersion in the distribution of per capita health spending as measured by the coefficient of variation has been relatively stable: 0.37 in 1980 and 0.40 in 1990. Growth in per capita spending in national currency units for six of the largest countries is analyzed later in this article. [TABULAR DATA 3 OMITTED]

There is a well-established relationship between health spending and GDP, with richer countries tending to spend relatively more on health care than poorer countries (Schieber, Poullier, and Greenwald, 1991). As shown in Table 4, 1980 per capita GDP in U.S. dollars ranged from $1,673 in Turkey to $12,197 in Switzerland. The United States had the second-highest per capita GDP at $11,890; the OECD average was $8,381. By 1990, per capita GDP had increased on average to $15,341, ranging from $3,316 in Turkey to $21,933 in the United States.(5) On average, per capita GDP grew during the decade at an annual rate of 6.2 percent across the OECD countries, ranging from 5.2 percent in Greece to 7.9 percent in Japan. The U.S. increase of 6.3 was just slightly above the average. The dispersion in the distribution of per capita GDP is somewhat lower than the dispersion in the distribution of per capita health spending; however, as with per capita health spending, the distribution has been stable, with a coefficient of variation of 0.28 in both 1980 and 1990. Growth in per capita GDP in national currency units for six of the largest countries is analyzed in the next section. [TABULAR DATA 4 OMITTED]

The relationship between per capita health spending and per capita GDP for the 24 countries is shown in Figure 1. The relationships between per capita health spending and per capita GDP are shown for 1980, 1985, and 1990. The cross-sectional OECD elasticity of per capita health spending to per capita GDP (percentage difference in per capita health spending relative to the percentage difference in per capita GDP) was 1.2 in 1980, 1.3 in 1985, and 1.3 in 1990.(6) Differences between the structural models are not statistically significant. Of particular interest is the increasing amount by which U.S. per capita health expenditures exceed the amount predicted based on the average relationships for the 24 countries. In 1980, U.S. per capita health expenditures were $150 above the trend line. In 1985, the United States was $350 above the trend line and, by 1990, was $700 above the trend line. In other words, U.S. spending is not only the highest in the world, but the absolute level of its spending appears to be increasingly out of line when the gauge is the average relationship between health spending and GDP in other countries.

Performance of six major countries

In this section, the expenditure performance of the U.S. health sector is compared with the health sector performances of Canada, France, Germany, Japan, and the United Kingdom on the basis of the framework and different measures already discussed: level and rate of growth in the health-to-GDP ratio; growth in nominal GDP and nominal total health spending; growth in nominal and real (health deflator-adjusted) per capita health spending; growth in real (GDP deflator-adjusted) per capita health spending; levels and rates of growth of per capita health spending in U.S. dollars; growth in nominal and real per capita GDP; levels and rates of growth in per capita GDP in U.S. dollars; growth in health care and overall prices (e.g., GDP deflator), as well as excess health care inflation (i.e., rate of growth in health care prices relative to the rate of growth in the GDP deflator); and growth in population.

Tables 1, 3, and 4 contain the health-to-GDP ratios, per capita health spending, and per capita GDP in U.S. dollars. Table 5 displays for Canada, France, Germany, Japan, the United Kingdom, and the United States the 1980-90 rates of growth in: nominal health spending in national currency units (NCUs); nominal and real (both health and GDP deflator adjusted) per capita health spending in NCUs; nominal GDP in NCUs; nominal and real per capita GDP in NCUs; health care prices, GDP deflator, and excess health care inflation; and population.(7) Table 6 contains the nominal and real elasticities of per capita health spending relative to per capita GDP, respectively, for 1980-90, and the 1980-85 and 1985-90 subperiods. (The elasticities are calculated on a per capita instead of total basis in order to compare health expenditure relative to GDP growth after controlling for differential population growth.) The comparative performance of each country is discussed in turn, and where rankings are mentioned, we are referring to a nation's rank within these 6 countries, even when the data are displayed in one of the tables describing all 24 countries. [TABULAR DATA 5 OMITTED]

Canada

The Canadian system has been characterized as a provincial government health insurance model, in which each of the 10 provinces runs its own health system under general Federal rules and with a fixed Federal contribution. Entitlement to benefits is linked to residency, and the system is financed through general taxation. Private insurance is prohibited from covering the same benefits covered by the public system. However, more than 60 percent of Canadians are covered by complementary private policies. Seventy-three percent of all health expenditures are public, and an estimated 20 percent of health care expenditures are paid out of pocket.8 Hospitals are funded on the basis of global budgets, and physicians in both inpatient and outpatient settings are paid on a negotiated fee-for-service basis. The systems vary somewhat from province to province, and certain provinces such as Quebec have established global budgets for physician services. The Federal Government share of spending has progressively declined from the historic 50-percent share of all costs to 38 percent in 1990. The delivery system is composed largely of non-profit community hospitals and self-employed physicians. Only about 5 percent of Canadian hospital beds are not public; private hospitals do not participate in the public insurance program (Iglehart, 1986; Neuschler, 1990).

As shown in Table 1, the 1980 Canadian health-to-GDP ratio (7.4 percent) ranked fourth, below those of the United States, Germany, and France. By 1990, Canada (at 9.3 percent) had the second-highest ratio after the United States. Canada had the second-highest rate of growth in its health-to-GDP ratio, 2.3 percent per year, compared with 2.7 percent in the United States. The growth of this ratio is the result of more rapid growth in health spending relative to GDP. Over this period, nominal health spending (Table 5) increased at an annual rate of 10.5 percent, while nominal GDP increased at a rate of 8.0 percent. This 2.5-percentage-point differential is the second largest after the 2.9-percentage-point differential for the United States, illustrating how Canadian nominal health spending increases surpassed growth in the Canadian economy.

Table 5 also illustrates that from 1980 through 1990, the Canadian population increased at an annual rate of 1.0 percent, exhibiting a rate of growth matched only by the United States. As a result, nominal health spending per capita increased at an annual rate of 9.4 percent, the third-highest rate of increase. Real (health deflator-adjusted) per capita health spending, a proxy for increases in the volume and intensity of services per person, increased at an annual rate of 2.3 percent, and was the third-highest rate of increase after France and Japan. However, as shown later in the comparisons of absolute spending levels, Canada's 1980 base year spending was the third highest. Clearly, low rates of volume and intensity growth from a high base have very different implications than low rates of growth from a low base.

In terms of the opportunity costs of health sector spending, GDP deflator-adjusted per capita health spending increased at an annual rate of 4.3 percent, second only to the United States. Given Canada's relatively high base year spending level, Canadians are giving up a substantial amount of non-health spending in order to accommodate their health sector. The substantial difference between the rates of growth in health deflator-adjusted and GDP deflator-adjusted health spending is the result of excess health care inflation--the rate of growth in health prices relative to the rate of growth in the GDP deflator. Canada has the second-largest excess health care inflation problem after the United States, with health prices increasing at an annual rate of 1.9 percent faster than overall inflation.

Canada's nominal and real per capita GDP growth were in the middle of the six-country range. Canada's nominal per capita GDP increased at an annual rate of 6.9 percent and ranked third, after the United Kingdom and France. Real per capita GDP increased at an annual rate of 1.9 percent, the third-highest after Japan and the United Kingdom.

As shown in Table 6, for the entire 1980-90 period, nominal per capita health spending increased 26 percent faster than nominal per capita GDP (i.e., the elasticity of 1.26 indicates that every 10-percent increase in nominal per capita GDP was associated with a 12.6-percent increase in nominal per capita health spending). Canada had the second-highest rate of growth in nominal per capita health spending relative to nominal per capita GDP after the United States. Real per capita health expenditures increased 11 percent more slowly than real per capita GDP (i.e., the estimated real elasticity of 0.89 indicates that every 10-percent increase in real per capita GDP was associated with an 8.9-percent increase in real per capita health spending). Canada had the second-highest real elasticity after France(9). [TABULAR DATA 6 OMITTED]

In terms of absolute comparisons of per capita health spending in U.S. dollars, Table 3 shows that in 1980, Canada (at $773) ranked third after the United States ($1,064), and Germany ($856). In 1990, Canadian expenditures of $1,770 ranked second to those of the United States ($2,566), and substantially exceeded those of France ($1,532), the third-ranked country. Over the 10-year period, Canada had the second-highest annual rate of growth in per capita health spending in U.S. dollars, 8.6 percent, compared with 9.2 percent for the United States and 8.1 percent for Japan, the third-ranked country.

In terms of per capita GDP denominated in U.S. dollars, in 1980, Canada (at $10,479) ranked second after the United States ($11,890), and was higher than Germany ($10,174), the third-ranked country. In 1990, Canada ($19,063) still ranked second after the United States, ($21,933), with Germany third ($18,317). With an annual rate of growth of 6.2 percent, Canada ranked fourth after Japan, the United Kingdom, and the United States.

In summary, Canada's health-to-GDP ratio increased sharply from 7.4 percent in 1980 to 9.3 in 1990; the rate of growth was second only to that of the United States. Canadian nominal health expenditures have grown faster relative to GDP than in the other five countries, with the exception of the United States.

France

The French health care system is based on the social insurance or Bismarck model. Virtually the entire population is covered by a statutorily based compulsory health insurance plan financed through the social security system. There are three major programs and several smaller ones (although the principal one, Caisse Nationale d' Assurance Maladie des Travailleurs Salaries, covers about 70 percent of the population) that are quasi-autonomous non-governmental bodies. The system is financed through employee and employer payroll tax contributions. There is significant cost sharing and more than 80 percent of the population supplements their public benefits by purchasing insurance from private non-profit mutuels. About 2 percent of the population has private commercial insurance.

The public share of total health spending is 74 percent, and about 17 percent of expenditures represent direct out-of-pocket payments. Physicians practicing in public hospitals are salaried, but physicians in private hospitals and in ambulatory care settings are typically paid on a negotiated fee-for-service basis. Public hospitals are paid by means of prospective global budgets, and private hospitals are paid on the basis of negotiated per diem payment rates. In terms of the delivery system, about 65 percent of hospital beds are public, with the remaining 35 percent private (and equally divided between profit and nonprofit). Ambulatory care physicians and those practicing in private hospitals are generally self-employed, while those practicing in municipal health centers and public hospitals are salaried employees (Organization for Economic Cooperation and Development, to be published; Schneider et al., 1992; Glaser, 1991; U.S. General Accounting Office, 1991).

For the 1980 base year, France (at 7.6 percent) had the third-highest health-to-GDP ratio, after the United States and Germany. By 1990, France's ratio had increased to 8.8 percent, ranking third after the United States and Canada. France's health-to-GDP ratio grew at an annual rate of 1.6 percent, the third-highest rate of growth, after the United States and Canada. Over this period, nominal health spending increased at an annual rate of 10.4 percent, while nominal GDP increased at an annual rate of 8.7 percent, 1.7 percentage points slower. This illustrates that France's spending on health, unadjusted for inflation or population growth, outstripped growth in the economy. France's was the third-largest percentage-point differential, after the United States and Canada.

From 1980 to 1990, France's population increased at an annual rate of 0.5 percent, the fourth-highest rate of growth, but still only one-half the rate of growth of Canada and the United States. As a result, nominal per capita health spending increased at an annual rate of 9.9 percent, the highest of the six countries. Real (health deflator-adjusted) health spending increased at an annual rate of 4.5 percent, 50 percent higher than the rate of the next-highest country, Japan, with 3.0 percent. This would suggest an exceptionally large annual increase in the volume and intensity of services provided to the French population. However, as discussed below, France's substantial negative excess health care inflation over sustained periods of time raises questions about the validity of the French health care price deflators (Schieber, 1990).

In terms of the opportunity cost of health sector expenditure growth, GDP-deflated per capita health expenditures increased at an annual rate of 3.3 percent, ranking France fourth after the United States, Canada, and Japan. France is the only country in which health deflator-adjusted per capita health expenditure growth exceeded GDP deflator-adjusted per capita health spending growth. This is because France is the only country with negative excess health care inflation. From 1980 to 1990, health care prices grew 1.1 percent per year less rapidly than the GDP deflator. Whether this reflects stringent control over health care prices or methodological issues (e.g., excessive productivity adjustments) concerning the health care price index is difficult to say.

France's nominal per capita GDP growth was among the highest of the six countries, while its real per capita growth was among the lowest. Nominal per capita GDP grew at an annual rate of 8.2 percent and ranked second after the United Kingdom. Real per capita GDP grew at an annual rate of only 1.7 percent, just slightly above the last-ranked United States, 1.6. As shown in Table 6, for the entire 1980-90 period, nominal per capita health spending increased 18 percent faster than nominal per capita GDP, giving France the third-highest rate of growth in nominal per capita health spending relative to nominal per capita GDP, after the United States and Canada. France far and away had the highest growth in real per capita health spending relative to real per capita GDP, with real per capita health spending increasing 135 percent more rapidly than real per capita GDP. These results must be interpreted with caution, given the questionable validity of the French health care price deflators.

In terms of comparisons of per capita health spending in U.S. dollars (shown in Table 3), France's per capita spending of $736 in 1980 ranked it fourth behind the United States, Germany, and Canada. By 1990, France (at $1,532) had surpassed Germany and ranked third. With an annual rate of growth of 7.6 percent, France ranked fourth behind the United States, Canada, and Japan.

In terms of per capita GDP in U.S. dollars (Table 4), France's 1980 level of $9,742 ranked fourth after the United States, Canada, and Germany. In 1990, France (at $17,364) ranked fifth, exceeding only the United Kingdom. Over the 1980-90 period, France's annual rate of growth of 5.9 percent was the lowest of the six countries.

In summary, France's health-to-GDP ratio increased from 7.6 percent in 1980 to 8.8 percent in 1990 and exhibited the third-highest rate of growth after the United States and Canada. France (like the United States and Canada) demonstrated nominal health spending growth that significantly exceeded growth in GDP.

Germany

The German health care system is also based on the social insurance model. Virtually the entire population is covered by statutory sickness funds and private insurance. There are some 1,200 sickness funds that cover about 88 percent of the population. These sickness funds are financed through payroll-based contributions by the employee and employer. About 9 percent of sickness fund members purchase complementary private insurance. Another 10 percent of the population chooses not to participate in the public system and is fully covered by private insurance. Seventy-three percent of all health expenditures are public, and about 11 percent are direct out-of-pocket payments.

Ambulatory and inpatient care are completely separate, and German hospitals generally do not have outpatient departments. Ambulatory care physicians are paid on the basis of fee schedules negotiated between the organizations of sickness funds and organizations of physicians. There is a separate fee schedule for private patients that uses the same relative value scale. Hospitals are paid on the basis of negotiated per diem payments that include the physician's remuneration, except for private patients, for whom private insurers make separate fee-for-service payments for inpatient physician services. Individual hospitals negotiate payment rates with the sickness funds.

With regard to the delivery system, public (Federal, State, and local) hospitals account for about 51 percent of the beds; private voluntary hospitals, often run by religious organizations, account for 35 percent of the beds; and private for-profit hospitals, generally owned by physicians, account for 14 percent of the beds. Ambulatory care physicians are generally self-employed professionals, and most hospital-based physicians are salaried employees of the hospital (Schneider, 1991, 1992; Hurst, 1991; Wicks, 1992).

Germany is the only one of the six countries to experience a decline in its health-to-GDP ratio. This ratio (Table 1) declined from 8.4 percent in 1980 to 8.1 percent in 1990, falling at an annual rate of 0.4 percent. Unlike any of the other countries, German nominal GDP grew faster than nominal health spending. From 1980 to 1990, nominal GDP grew at an annual rate of 5.0 percent, compared with a rate of 4.6 percent for nominal health spending. The fact that Germany's growth in nominal health spending is slower than the growth in the overall economy may be the result of a deliberate national policy to tie health care expenditure growth to growth in the wage base.

Germany's low rates of growth for health spending are preserved when considered on a per capita basis, despite the fact that Germany had the lowest population growth. From 1980 to 1990, Germany's population grew at an annual rate of only 0.2 percent, with the United Kingdom having the lowest growth rate for the six countries. German health spending per capita increased at an annual rate of 4.4 percent, the lowest of the six countries. Germany also had the lowest annual increase in real (health deflator-adjusted) per capita spending, 1.1 percent. This is substantially less than the 1.9 percent for the United Kingdom, the second-lowest country. In terms of the opportunity costs of health expenditure growth (GDP deflator-adjusted per capita spending), Germany's rate of 1. 5 percent was substantially below the rates for the other five countries. Rates for the other countries all exceeded 3 percent. After France, Germany had the lowest excess health care inflation, with health care prices increasing only 0.4 percent per year faster than the GDP deflator.

Germany's nominal and real per capita GDP growth were among the lowest of the six countries. From 1980 to 1990, nominal per capita GDP increased at an annual rate of 4.8 percent, the lowest of the six countries. At 1.8 percent, Germany had the third-lowest rate of growth in real per capita GDP after the United States (1.6 percent) and France (1.7 percent). As shown in Table 6, for the entire 1980-90 period, nominal per capita health spending increased 5 percent less rapidly than nominal per capita GDP, giving Germany the distinction of being the only one of the six countries in which nominal per capita health spending increased less rapidly than nominal per capita GDP. Real per capita health spending increased 18 percent less rapidly than real per capita GDP, giving Germany the fourth-highest real elasticity.

In terms of absolute U.S. dollar comparisons of per capita health spending, German spending of $856 in 1980 was the second highest after the United States (Table 3). By 1990, German spending of $1,486 per person ranked fourth. With a 1980-90 annual growth rate of 5.7 percent, Germany had the lowest rate of growth of per capita health spending denominated in U.S. dollars, substantially below the 7.4-percent rate for the United Kingdom, the second-lowest growth country.

In terms of per capita GDP denominated in U.S. dollars (Table 4), Germany ranked third after the United States and Canada in both 1980 and 1990, with per capita GDP of $10,174 in 1980 and $18,317 in 1990. With an annual increase of 6.1 percent, Germany had the second-lowest rate of increase after France at 5.9 percent.

In summary, Germany's health-to-GDP ratio declined over the 1980-90 period, from 8.4 percent in 1980 to 8.1 percent in 1990. Germany was the only country of the six examined in which growth in nominal health spending did not exceed growth in the overall economy.

Japan

Japan's health care financing is also based on the social insurance model and, in particular, on the German health care system. The entire population is covered by three general schemes: Employee Health Insurance, Community Health Insurance, and Health and Medical Services for the Aged. About 62 percent of the population receives coverage through some 1,800 employer-sponsored plans. Small businesses, the self-employed, and farmers are covered through Community Health Insurance, which is administered by a conglomeration of local governmental and private bodies. The elderly are covered by a separate plan that largely pools funds from the other plans.

The system is financed through employer and employee income-related premiums. There are different levels of public subsidization of the three different schemes. Limited private insurance exists for supplemental coverage. Public expenditures account for 72 percent of total health spending, while out-of-pocket expenses account for about 12 percent. Physicians and hospitals are paid on the basis of national negotiated fee schedules. Physicians practicing in public hospitals are salaried, while those practicing in physician-owned clinics and private hospitals are reimbursed on a fee-for-service basis. Physicians prescribe and dispense pharmaceuticals. About 80 percent of Japan's hospitals are privately operated (and often physician-owned), with the remaining 20 percent being public. For-profit hospitals are prohibited (Ikegami, 1991; Iglehart, 1988; U.S. General Accounting Office, 1991; Powell and Anesaki, 1990).

Japan's 1980 health-to-GDP ratio of 6.4 percent was the second-lowest after the United Kingdom's 5.8 percent. In 1990, Japan, with a ratio of 6.5 percent, still ranked second after the United Kingdom. Over this 10-year period, Japan had the second-slowest growth, after Germany, in its health-to-GDP ratio, 0.1 percent per year. Also over this period, nominal health expenditures grew at an annual rate of 6.0 percent per year, only slightly faster than the 5.9-percent rate for its nominal GDP.

Population increased at an annual rate of 0.6 percent, the third-highest rate of growth after the United States and Canada. Nominal per capita health spending increased 5.4 percent, the second-lowest rate after Germany. However, real (health deflator-adjusted) health spending increased 3.0 percent, the second-highest rate after France. This can perhaps be attributed to Japan's relatively low 1980 base year spending as well as the strong growth in its economy.

In terms of the opportunity cost of health care spending, GDP deflator-adjusted per capita health spending increased 3.7 percent, the third-highest rate of growth after the United States and Canada. In terms of excess health care inflation, Japan ranked fourth, with health care prices increasing 0.7 percent per year faster than the GDP deflator.

Japan's nominal per capita GDP increased at an annual rate of 5.3 percent, second-lowest after Germany, perhaps reflecting the lower absolute inflation rates in these two countries relative to the other four. However, Japan had by far the largest growth in its real per capita GDP, with its 3.6-percent rate substantially above the 2.4 percent for the United Kingdom and the 1.6-1.9 percent for the other four countries. As shown in Table 6, for the entire 1980-90 period, nominal per capita health spending increased at the same rate as nominal per capita GDP, giving Japan the second-lowest nominal elasticity after Germany. Real per capita health spending increased 32 percent less rapidly than real per capita GDP, resulting in Japan having the second-lowest real elasticity after the United Kingdom.

In terms of per capita health spending in U.S. dollars (Table 3), Japan had the second-lowest spending after the United Kingdom in both 1980 and 1990. In 1980, Japan spent $540 per capita, about one-half the U.S. level. By 1990, health spending per person had increased to $1,171, less than one-half of the U.S. level. However, the 8. 1-percent rate of growth was the third-highest after the United States and Canada.

Per capita GDP in U.S. dollars increased from $8,409 in 1980 to $17,994 in 1990, 7.9 percent, substantially higher than the other five countries. This resulted in Japan's per capita GDP moving from the second-lowest in 1980, after the United Kingdom, to the third-lowest in 1990, after the United Kingdom and France.

In summary, Japan's health-to-GDP ratio remained relatively stable, increasing slightly from 6.4 percent in 1980 to 6.5 percent in 1990. In both 1980 and 1990, Japan consistently had the second-lowest health-to-GDP ratio behind the United Kingdom. Over this 10-year period, Japan's nominal health spending increased at about the same rate as nominal GDP.

United Kingdom

The United Kingdom employs the National Health Service or Beveridge model to finance and deliver health care. The entire population is covered under a system that is financed mainly from general taxation. There is minimal cost sharing. Some 15 percent of the population buys private insurance either as a supplement to the public system or as an alternative. Eighty-four percent of all health spending is public and about 4 percent of all spending represents direct out-of-pocket payments. Services are organized and managed by regional and local public authorities. General practitioners serve as gatekeepers and are reimbursed on the basis of a combination of capitation payments, fees, and other allowances. Hospitals receive global budgets from district health authorities, and hospital-based physicians are salaried. Private insurance reimburses both physicians and hospitals on a fee-for-service basis.

With regard to the delivery system, self-employed generals are considered independent contractors, and salaried hospital-based physicians are public employees. Ninety percent of the United Kingdom's hospital beds are public and generally owned by the National Health Service. As of 1991, it became possible for large physician practices to become "budget holders," receiving a larger capitation payment and being placed at risk for a defined list of inpatient and outpatient services. Similarly, individual hospitals may become "self-governing trust hospitals," whereby they can compete for patients and sell their services (Organization for Economic Cooperation and Development, to be published; Schneider, 1992; Day and Klein, 1991).

The United Kingdom devotes the smallest percentage of its GDP to health care of the six countries. In 1980, the United Kingdom devoted 5.8 percent of its GDP to health, compared with 6.4 percent for Japan, the second-lowest, and 9.2 percent for the United States, the highest. In 1990, the United Kingdom still ranked last, devoting 6.2 percent, compared with second-lowest-ranked Japan (at 6.5 percent) and the United States (12.1 percent). Over this period, the United Kingdom's health-to-GDP ratio increased at an annual rate of 0.7 percent, the third-lowest rate of growth after Germany and Japan. Also during this time, nominal health spending increased 9.8 percent annually, while nominal GDP increased only slightly less rapidly, at 9.0 percent. This resulted in the United Kingdom having the third-lowest differential in growth between health and GDP after Germany and Japan.

Over the 1980-90 period, population increased at an annual rate of 0.2 percent, the lowest rate of growth along with Germany. Nominal health spending per capita increased at an annual rate of 9.6 percent, which was the second-highest, after France. However, real (health deflator-adjusted) per capita health spending increased at an annual rate of 1.9 percent, the second-lowest after Germany. This indicates that the United Kingdom's growth in health care resulting from volume and intensity increases was relatively low. In terms of the opportunities forgone in non-health sectors, GDP deflator-adjusted per capita health spending increased at an annual rate of 3.1 percent, ranking the United Kingdom fifth of the six countries. Because the relatively low volume and intensity and opportunity cost growth are based on a low 1980 level of spending, the growth and costs forgone are, in total, relatively small when compared with other countries.

In terms of excess health care inflation, the United Kingdom was third-highest, with health care prices exceeding the GDP deflator by 1.2 percent per year.

In terms of nominal per capita GDP growth, the United Kingdom ranked first, with an annual rate of 8.8 percent, slightly above second-ranked France's 8.2. In terms of real per capita GDP growth, the United Kingdom's 2.4-percent annual growth ranked second after Japan's 3.6. As shown in Table 6, for the entire 1980-90 period, nominal per capita health spending increased 4 percent faster than nominal per capita GDP, resulting in the United Kingdom having the third-lowest nominal elasticity after Germany and Japan. Real per capita health spending increased 38 percent less rapidly than real per capita GDP, resulting in the lowest real elasticity.

In terms of absolute comparisons of health spending in U.S. dollars, as in the case of the health-to-GDP ratio, the United Kingdom had the lowest levels in both 1980 and 1990. Per capita spending of $474 in 1980 was well below that of Japan (the second-lowest, at $540) and the United States ($1,064), the highest. In 1990, United Kingdom spending was $972, compared with second-lowest Japan (at $1,171) and first-ranked United States ($2,566). Over this period, per capita health spending grew at an annual rate of 7.4 percent, the second-lowest rate of increase after Germany, at 5.7 percent.

In terms of per capita GDP in U.S. dollars, the United Kingdom had the lowest level in both 1980 and 1990, $8,212 and $15,682, respectively. However, the United Kingdom's annual growth rate of 6.7 percent was the second-highest growth after Japan, at 7.9 percent.

In summary, the United Kingdom consistently had the lowest-ranking health-to-GDP ratio, devoting 5.8 percent in 1980 and 6.2 percent in 1990. Nominal health spending grew at 9.8 percent, increasing only slightly faster than GDP at 9.0 percent, giving the United Kingdom the third-lowest differential in growth between health and GDP after Germany and Japan.

United States

The U.S. health care financing system is based on the consumer sovereignty or private insurance model. About three-quarters of the population is covered by private insurance obtained through employers or individually purchased. Nineteen percent of the population is covered by public programs, while some 14 percent of the population has no coverage. These percentages total more than 100 percent because 13 percent of the population has multiple health insurance coverage (e.g., public and private coverage). There are more than 1,000 private insurance companies. Employer-based health insurance is tax-subsidized, as health insurance premiums are a tax-deductible business expense, but are not taxed as employee compensation. Benefits, premiums, and provider reimbursement methods differ among private insurance plans and differ among public programs as well. Public spending accounts for 42 percent of total health expenditures, and direct out-of-pocket payments account for 20 percent.

Physicians, providing both ambulatory and inpatient care, are generally reimbursed on a fee-for-service basis, and payment rates vary among insurers. Hospitals are paid on the basis of charges, costs, negotiated rates, or diagnosis-related groups, depending on the patient's insurer. There are no overall global budgets or expenditure limits.

There are some 6,700 hospitals in the United States: 340 Federal hospitals, 880 specialty hospitals, and 5,500 community hospitals. Of the community hospitals, 27 percent are public; 59 percent are private non-profit; and 14 percent are private for-profit. Physicians are generally self-employed professionals (Levit et al., 1991; DeLew, Greenberg, and Kinchen, to be published).

The United States had the highest health-to-GDP ratio in both 1980 and 1990 and also the fastest rate of growth. The health-to-GDP ratio increased from 9.2 percent in 1980 to 12.1 percent in 1990, for a 2.7-percent annual rate of growth. This rate of increase far exceeded the 2.3-percent rate of growth in Canada, the second-fastest growing country, as well as the 1.6-percent rate for France, the third-fastest. This rapid growth in the health-to-GDP ratio is primarily the result of the substantially faster rate of growth in U.S. health spending relative to GDP. Nominal health spending increased at an annual rate of 10.3 percent, 2.9 percentage points faster than the 7.4-percent rate of growth of nominal GDP. This 2.9-percentage point differential was the largest of the six countries and substantially exceeded the 2.5-percentage point differential in Canada, the country with the second-fastest-growing health-to-GDP ratio.

The United States, with an annual population growth of 1.0 percent, had (along with Canada) the most rapidly growing population. Nominal per capita health expenditures increased 9.2 percent annually from 1980 to 1990, ranking the United States fourth after France (at 9.9 percent), the United Kingdom (9.6 percent), and Canada (9.4 percent). In terms of real (health deflator-adjusted) per capita health spending, a measure of the volume and intensity growth per person, the U.S. rate of growth of 2.1 percent was the third-lowest after Germany (at 1.1 percent) and the United Kingdom (1.9 percent) and was just below Canada (2.3 percent).

With regard to the opportunity costs of health care spending, the GDP deflator-adjusted growth in per capita spending of 4.4 percent per year is the highest of the six countries. The United States' 4.4-percent annual growth rate exceeded Canada's 4.3 percent, Japan's 3.7 percent, France's 3.3 percent, the United Kingdom's 3.1 percent, and Germany's 1.5 percent. This high rate of growth is even more imposing, because, as we discuss later, the United States' 1980 base year spending level is 57 percent higher than the average for the other five countries. In other words, substantial amounts of non-health sector consumption and investment opportunities are being forgone because of the high rate of growth in U.S. health spending.

One of the major factors causing large opportunity costs, while volume and intensity growth per person is relatively low, is excess health care inflation. The United States had the highest excess health care inflation of the six countries. Over the 1980-90 period, U.S. health care prices increased at an annual rate that was 2.2 percent faster than overall prices compared with 1.9 percent in Canada, 1.2 percent in the United Kingdom, 0.7 percent in Japan, 0.4 percent in Germany, and -1.1 percent in France. Interestingly, the two countries with the highest rates of excess health care inflation are those that rely the most on fee-for-service payment for outpatient and inpatient physician services.

In terms of nominal per capita GDP growth, the U.S. annual rate of 6.3 percent ranked it fourth after the United Kingdom (at 8.8 percent), France (8.2 percent), and Canada (6.9 percent). However, after adjusting for inflation, U.S. real per capita GDP growth of 1.6 percent was the lowest of the six countries.

As shown in Table 6, over the entire 1980-90 period, U.S. nominal per capita health spending increased 36 percent faster than nominal per capita GDP, giving the United States the highest rate of growth in nominal per capita health spending relative to nominal per capita GDP of the six countries. The U.S. nominal elasticity of 1.36 substantially exceeded the nominal elasticities of 1.26 in Canada, 1. 18 in France, 1.04 in the United Kingdom, 1.00 in Japan, and 0.95 in Germany. Perhaps even more troubling is the 1.53 U.S. nominal elasticity for the 1985-90 time period. No other country even came close, with Canada at 1. 16, France 1. 14, the United Kingdom 1.06, Japan 1.00, and Germany 0.70. Thus, over this most recent 5-year period, nominal per capita U.S. health spending grew 53 percent faster than nominal per capita GDP--still more evidence of a worsening U.S. health cost problem. Concerning real elasticities, real per capita U.S. health spending increased 12 percent less rapidly than real per capita GDP, giving the United States the third-highest real elasticity after France and Canada. Once again, the more recent 1985-90 period paints an even worse picture, with the real elasticity of 1. 14 substantially higher than the real elasticities of all countries except France.

In terms of absolute per capita health spending in U.S. dollars, U.S. spending was the highest in both 1980 and 1990 and the United States had the highest rate of growth. Per capita spending of $1,064 in 1980 was 24 percent higher than Germany, 38 percent higher than Canada, 45 percent higher than France, 97 percent higher than Japan, and 124 percent higher than the United Kingdom. By 1990, U.S. spending of $2,566 exceeded that of Canada by 45 percent, France by 67 percent, Germany by 73 percent, Japan by 119 percent, and the United Kingdom by 164 percent. The 9.2-percent annual rate of growth in the United States compared with 8.6 percent in Canada, 8.1 percent in Japan, 7.6 percent in France, 7.4 percent in the United Kingdom, and 5.7 percent in Germany. This higher U.S. rate of growth is especially significant given the fact that U.S. 1980 base year spending was 57 percent above the average for the other five countries. By 1990, U.S. spending was 85 percent above the average for these five countries.

In terms of per capita GDP denominated in U.S. dollars, relative to the other five countries, the United States had the highest levels in both years. In 1980, U.S. per capita GDP of $11,890 exceeded that of Canada by 13 percent, Germany by 17 percent, France by 22 percent, Japan by 41 percent, and the United Kingdom by 45 percent. By 1990, U.S. per capita GDP of $21,933 exceeded that of Canada by 15 percent, Germany by 20 percent, Japan by 22 percent, France by 26 percent, and the United Kingdom by 40 percent. The U.S. annual growth rate of 6.3 percent was lower than that of Japan (at 7.9 percent) and the United Kingdom (6.7 percent), but slightly above that of Canada (6.2 percent), Germany (6.1 percent), and France (5.9 percent). Thus, the gaps between the United States and Japan and the United Kingdom narrowed, but increased very slightly between Canada, Germany, and France. U.S. per capita GDP exceeded the average for the other five countries by 26 percent in 1980 and 24 percent in 1990.

Conclusion

By virtually all measures, U.S. health spending is the highest in the world. Over the past 10 years, whether in absolute dollar terms or relative to its GDP, U.S. health care expenditures have increased faster than spending in other countries, and the gap between the United States and other major industrialized countries has increased. The opportunity costs of U.S. health expenditure growth are the largest of the six major countries. Excess health care inflation in the United States exceeds excess health care inflation in other major countries. Health spending relative to GDP is increasing more rapidly in the United States than in other countries.

Although one cannot draw definitive conclusions about overall health sector performance in the absence of better measures of underlying morbidity and outcomes, the cost-containment measures of the past have done little to slow the growth of U.S. health care expenditures. This is not surprising because virtually all incentives (e.g., tax subsidies, fee-for-service reimbursement, non-price competition among providers, consumer expectations, malpractice risks) promote increased spending. In a system in which no one is in charge--neither empowered consumers nor powerful regulatory bodies--and in which major new technological breakthroughs abound, it is not surprising that costs are out of control while millions of people lack insurance coverage. Moreover, unlike other countries, the United States has not found an equitable way to spread over its entire population the costs of insuring its health risks.

For health care reform to succeed, the United States must solve at least three problems that have been dealt with by the other major industrialized countries:

* The poor and disadvantaged must be provided with

health services, health insurance, or the financial

means to purchase health insurance.

* For the non-poor, a mechanism must be found to

pool health risks while reforming private health

insurance (e.g., having guaranteed issue, eliminating

pre-existing conditions and non-renewability clauses).

* Mechanisms must be found to control costs.

All other major industrialized countries cover their entire populations either through guaranteed entitlement or as an earned right. There are special provisions to cover the poor and disadvantaged and those outside the labor force. All the major U.S. reform bills deal with this problem either through tax credits or direct entitlement. However, underlying all these reforms is the need for the United States to find a way to finance this enhanced coverage. Other countries have been willing to accept higher aggregate tax burdens (Organization for Economic Cooperation and Development, 1990). What will emerge from the current U.S. debate is unclear (Enthoven, 1992; Reinhart, 1992), although the financing mechanisms under discussion include: higher taxes, administrative efficiencies, insurance market reform, coordinated care, managed competition, all-payer ratesetting, expenditure limits, cost-sharing, beneficiary premiums, reduction of tax subsidies, effectiveness research, and medical malpractice reform.

Other countries have dealt with pooling health risks in a more equitable manner either through universal entitlement to a single system or by forcing financial transfers across sickness funds to adjust for differential risk selection. For example, in the United Kingdom, everyone is guaranteed access to the National Health Service. In both Germany and Japan, interfund transfers are required to adjust for the favorable health risk selection of some plans over others. Ability to pay is dealt with either through a progressive national tax structure as in the United Kingdom or through subsidies by social assistance programs and local governments as in Germany and Japan. Making the plausible assumption that private health insurance will remain the principle form of health insurance for the non-poor and non-aged in the United States, it is essential to develop policies that either prohibit or counteract the mechanisms used to achieve favorable risk selection (Light, 1992).

Perhaps most difficult is the need to control costs. Other major industrialized countries have tended to rely on regulatory mechanisms such as expenditure caps, global budgets for hospitals, salary and capitation payments for physicians, and health planning. Nevertheless, these countries have also learned that capping spending does not necessarily lead to efficient provision or consumption within the cap. As a result, numerous countries are attempting to eliminate micro-inefficiencies by experimenting with diagnosis-related groups and other market-oriented payment incentives.

Effective cost containment is a necessary condition for health care reform. Successful cost containment in this country will require a fundamental commitment to a major market-oriented and/or serious regulatory approach. As Altman and Rodwin (1988) have argued, the halfway measures of the past have not worked. The basic questions are: Do Americans and their elected representatives have the desire and political will to change a worsening status quo? Are Americans interested in value for money and equity? Is there a willingness to redistribute income in the current social and economic climate? These are important questions to ponder as the United States approaches the 21st century with the prospect of a $1.6 trillion health sector consuming one out of every six dollars of total output. (1) For Australia, the change refers to a different allocation of data between fiscal years. For Belgium, more comprehensive public sector data were obtained. For Canada, official 1988-90 data were obtained. In Iceland, Ireland, Italy, and the Netherlands, benchmark revisions have been conducted. Sweden reclassified certain expenditures on mental health from health to social services. Spain adopted a new comprehensive process for estimating its outlays on health. (2) The methodological details of the new PPPs have not been released at this time. However, the new values have been published in (Organization for Economic Cooperation and Development, 1992a). (3) For purposes of this article, all growth rates are compound annual rates. (4) All averages are the simple means of the individual country values. Thus, each country has an equivalent weight. Other weighting schemes are clearly possible (e.g., population). (5) The U.S. GDP series developed by the Bureau of Economic Analysis in the U.S. Department of Commerce excludes the territories, but the national health expenditures and population series presented in the appendix tables include the territories. Thus, the comparable 50-State population figures used to calculate U.S. per capita GDP are taken from (Organization for Economic Cooperation and Development, 1992a). (6) The elasticities are slightly higher if based on a logarithmic model: 1.3 in 1980, 1.5 in 1985, and 1.4 in 1990. (7) Other comparative measures, such as rates of growth in real total health spending and real GDP, can be calculated from the data presented in the table by dividing the rates of growth in nominal health spending and GDP by the rates of growth in health care prices and the GDP deflator, respectively (Schieber and Poullier, 1989). (8) This is an unofficial estimate from the Canadian Department of National Health and Welfare. (9) The real elasticities should be interpreted with caution, given the questionable comparability and reliability of the health care price indexes. Because all countries except France face excess health inflation, it is not surprising that many of the real elasticities are below 1.0.

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Author:Schieber, George J.; Poullier, Jean-Pierre; Greenwald, Leslie M.
Publication:Health Care Financing Review
Date:Jun 22, 1992
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