Occam’s Razor, Health Care Costs, and Insurance Coverage

François de Brantes

The United States spends $4,000 more per person per year on health care than most other high-income countries, and the health care sector is on track to be fully one fifth of the American GDP.

Editorials, peer-reviewed papers, and most trade and general media articles on health care emphasize the Byzantine complexity of the health care system, and that complexity is sometimes given as the reason for American health care being so expensive.

But it’s not just complexity that gets the blame. Countless hours have been spent coming up with a long litany of explanations. Irene Papanicolas and her colleagues recently published a paper in JAMA showing that most of them are—to be diplomatic about it—not entirely valid.

Let’s review some of that litany:

  • Consumers aren’t discerning, don’t follow their physician’s advice, and end up using up a whole lot of services that aren’t needed. But Papanicolas showed that the use of health care services in the United States is actually comparable to that of other countries. We are not a nation of hypo­chondriacs and seekers of medical attention for its own sake.
  • Americans don’t take care of themselves and have bad health habits, which lead to poor health and, eventually, use of expensive services—hospitalizations—instead of less-expensive ones—seeing a primary care physician. But comparisons with other countries show that while Americans are heavier than Germans, Australians, and the British, Americans smoke and drink less. Americans are also hospitalized less often, and when they are admitted, spend less time in the hospital.
  • The United States has an overabundance of specialists and not enough primary care physicians. Actually, the 57–43 ratio of specialists to primary care physicians in this country is roughly the same as that in other countries. But on a per capita basis, we have fewer physicians overall—less than 3 for every 1,000 people—than other developed countries.
  • Doctors in this country practice defensive medicine out of fear of being sued, so they order more tests and treatments than medically necessary. It’s true that American doctors order more diagnostic imaging tests, but only 25% to 30% more.

The real reason for higher costs in the U.S. is simpler. Prices are high and keep getting higher. Occam’s razor and the law of parsimony applies.

To blame prices entirely would be an oversimplification. Some procedures are performed more often. A recent article in the Economist points at all the administrative middlemen who are getting a cut of the health care dollar. By some estimates, the combination of these factors accounts for more than two thirds of the difference between per capita health care spending in the United States, relative to spending in other countries. In absolute terms, that’s close to a trillion dollars in excess prices, administrative costs, and procedures.

Cost up, affordability down

The price tag has had—and continues to have—implications for all Americans. The total cost of care per person is converted, year in and year out, into a health insurance premium that is paid by individuals, employers, states, and the federal government, and into out-of-pocket expenses in the form of deductibles, copays, and coinsurance. The combination of the individual’s portion of the premium and out-of-pocket expense affects the ability of Americans to afford health insurance and, therefore, the coverage of a population.

It’s no mystery why this country has both the highest per capita health care costs and the lowest overall percentage of people with coverage. The two are connected, but as if on a teeter-tooter: As one goes up, the other goes down.

Now back to William of Occam, his razor, and slicing through to the simplest explanation. The ability for individuals (and a country) to afford health insurance is directly tied to the costs of health care per person. The higher the costs, the less affordable insurance becomes. To borrow a phrase, it’s that simple, stupid.

François de Brantes is an independent consultant in Newtown, Conn. He was formerly the executive director of the Health Care Incentives Improvement Institute.

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