A Fresh Look at Health Care Cost Growth

In this post I recast the visual display of international health care expenditures. For select OECD countries, this clearly shows the growth of average costs has been moderating while U.S. cost-growth has been accelerating. The graph methodology is discussed along with a caution about marginal thinking. A conjecture is presented as to why the OECD cost-growth is moderating followed by a couple thoughts for action.

What’s Usually Presented
There are many graphs published of international health care expenditures (HCE). Some remind me of multi-colored electric cables strung together, except for one cable that strays from the group. Others are simpler but their message is obscured with chart junk. Here’s a recent example of the electric-cable chart.

ConfrontingCostsThis chart shows HCE trending as a percentage of GDP for a group of OECD countries, with the U.S. as an outlier. If the purpose of such charts is to emphasize how out of whack U.S. HCE is, then they work. But they don’t contribute any new insight.

A Different Approach
I wanted to see the data from its beginning, 1960, to get a better sense of trend, as well as something less obtrusive than a bunch of multi-colored squiggly lines. Here’s my version.

US_OECDhcegdpIt shows a parallel trend from 1960 to almost 1980 followed by subsequent U.S. accelerated cost-growth. It also clearly shows average OECD (less the U.S.) cost-growth decelerating. To construct this graph, I started with the original 20 OECD countries, 18 European countries, Canada and the U.S.1 There were many missing values with only nine countries having data for all 51 years. I arbitrarily picked 25% missing as a cut off, which excluded five European countries.2 A visual inspection of the three sets of data (no missing values, fewer than 25% missing, and all 20 countries) indicated it didn’t practically matter: the three curves using 9, 15 or 20 countries were visually similar.3 I opted for the 25% cut-off. A simple unweighted average consolidated the OECD countries into a mean for each year, using up to 14 values depending on the number missing. This resulted in two data points, the U.S. and OECD, for each of the 51 years. These were then averaged and based on the years 1960-1980 were used to estimate a linear trend, which was then extrapolated out to 2010 as if the early trend continued past 1980. This overall linear trend became a visual reference line. (One reason I decided to use %GDP instead of per capita expenditures is the latter is curvilinear and so did not permit a simple intuitive reference line.) Lastly, local polynomials were fitted to the U.S. and OECD data for smoothing. All of these, the pair of data points for each year, the linear trend and the polynomials, comprise the above graph.

The following difference graph emphasizes the divergence. This graph is simply the difference of the two polynomials from the linear trend line.

DifferenceChartThese two graphs show that U.S. HCE has been accelerating since the late 1970’s. Contrariwise, they also show that OECD cost-growth has been moderating. A quick review of relevant literature indeed indicates this is happening.4 At least for me, though I had previously read some of that literature, the OECD deceleration hadn’t sunk in till I saw these graphs.

A Cautionary Note
I take it for granted that contemporary OECD countries generally have better non-medical determinants of health than we do, as well as a more extensive social safety net. For example, regarding children the U.S. ranks below average in preschool enrollment and high school graduation rates while having higher than average child poverty rates. Better education and lower child poverty are associated with better population health. But they come with costs. Germane to comparative graphs like these is those costs are not included in HCE. Think of the resources that go into other determinants of health and the safety net as fixed or sunk costs, while health care costs can be thought of as marginal costs. The OECD has invested more in fixed costs than the U.S. but that is not reflected when comparing the marginal, health care, costs. The fixed v. marginal cost disparity doesn’t explain the divergence shown in the graphs, but it does mean the HCE numbers are not apples-to-apples comparable.

What Explains the Divergence?
I can’t say for certain why there’s a divergence but I do have a reasoned conjecture. Broken down by structural, conceptual and empirical elements, it is this: Structurally, OECD countries have better non-medical determinants of health, such as lower poverty rates and greater educational opportunity. This is in part because they started fresh after the devastation of WW II. (About 36.5 million Europeans were killed along with significant property destruction, e.g., 40% of German homes were destroyed. This was then followed by the European Economic Miracle.)5 Conceptually, the OECD is more systems oriented. For instance, they emphasize a Health System—not a Health Care System but a Health System. The only times I’ve heard Health System mentioned integral to the U.S. was as a joke. The OECD has made a concerted sustained effort at cost containment. But it’s not just that. For example, in some of their writings they aspire towards stewardship.6 If nothing else, they think more long-term while we are almost synonymous with short-termism. Empirically, their chronic disease prevalence is significantly less than ours, treatment for chronic diseases account for more than 75% of U.S. health care costs, and chronic disease is largely preventable.7

Here’s a chart that illustrates the chronic disease contrast between the U.S. and selected OECD countries. (Some countries are different than the 14 used above.) U.S. chronic disease prevalence conspicuously exceeds that of the other countries.

EvChronicDisDiffIn summary the conjecture is: Improved non-medical determinants of health reduce the prevalence of chronic disease. That coupled with a concerted long-term effort to control costs has moderated OECD HCE cost-growth. I am obviously glossing over many other important contributing factors (e.g., primary physician utilization, different chronic care models). However, this conjecture strikes me as potentially useful for generating policy discussion and formation and should be pursued. It also helps explain the charts’ divergence.

A Couple Thoughts for Action
In light of the divergence-plots it would be fruitful to broadly explore why the OECD cost-growth is declining, not only why ours is increasing. What’s critical is to learn from other’s successes and to be clear about what we know and don’t, and act accordingly. Let’s assume I’m close with my conjecture, that non-medical determinants of health contribute to lower prevalence of chronic disease and thus reduced HCE. Then we should move toward implementing better determinants—not just behaviors but also improving the environments where those behaviors occur. Such an investment would be potentially cost effective by decelerating our cost-growth. If we don’t, we’ll likely pay anyway with higher HCE. I’m reminded of a precept attributed to Henry Ford: “If you need a machine and don’t buy it, then you will ultimately find that you have paid for it and don’t have it.”  I think that’s where we’re at now.

One other thought to share: If chronic disease accounts for more than 75% of our HCE, then we need a standard age-adjusted Chronic Disease Index. Such an index would facilitate discussion, analyses, assessment and international comparisons. If we can create a GDP index and an YPLL index (Years of Potential Life Lost), we surely can create a Chronic Disease Index.

A Final Thought
The emphasis in this post has been on costs and benefits. Our health and well-being as a nation was not mentioned but would significantly benefit from an investment in a better life for Americans. We could think of it as a Marshall Plan for the U.S.A.


  1. The original 20 members of the OECD: Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.
  2. The five countries with more than 25% missing data: France, Greece, Italy, Luxembourg, and Turkey.
  3. For Stata users who would like to explore the 20-country %GDP data themselves, the -do- and -dta- files I used to create the HCE graphs are available here: https://dl.dropboxusercontent.com/u/4207674/anHCEOECDGDP.do, and here https://dl.dropboxusercontent.com/u/4207674/oecdhcegdp4.dta
  4. See, e.g., Chapin White. Health Care Spending Growth: How Different Is The
    United States From The Rest Of The OECD? Health Affairs, 26, no.1
  5. The estimates, 36.5 million casualties and 40% homes destroyed, was from
    Judt, Tony. Postwar: A History of Europe Since 1945. New York: The Penguin Press,
    2005., pages 17 and 82 respectively.
  6. Searching the Internet on terms like, OECD stewardship health systems cost containment, will give you plenty of material. However, if you prefer not to search, I found the following useful (of what I’ve read so far): Figueras, Josep and M. McKee, eds. Health Systems, Health, Wealth and Societal Well-being. McGraw Hill Open University Press, 2012. Available here: http://www.euro.who.int/__data/assets/pdf_file/0007/164383/e96159.pdf.
  7. The idea that higher chronic disease prevalence would help explain higher U.S. cost growth is not new. The following article by Thorpe et al. argues that position but from a behavioral risk factor perspective: Thorpe, Kenneth E., D. Howard, K. Galactionova. Differences In Disease Prevalence As A Source Of The U.S.-European Health Care Spending Gap. Health Affairs, (October 2, 2007): w678-w686. Exhibit 2 of the article gives comparative prevalence statistics.

3 thoughts on “A Fresh Look at Health Care Cost Growth

  1. Pingback: A Fresh Look at Health Care Cost Growth | The Health Care Blog

  2. Thanks Frank. I like the cost graph and the points about social determinants and the burden of chronic illness in the US. I tried at one point to get a handle on our state’s spending on education and employment by looking at the state budget. If we expand the HCE calculation to include just state government investments in education, and call that ‘health promotion’, it radically changes the ‘old saw’ about US health spending being dominated by treatment over prevention. It also greatly increases the share of our state (and nation’s) wealth devoted to ‘health improvement’. Our state and local spending on K-12, community college and higher education institutions is roughly double our state’s health spending. I would not be surprised to see total education spending in our state (all public and private) equal all health spending.

    And that says nothing of spending on other ‘social determinants’ of health like income and wealth including things like job training and placement, unemployment insurance, business incentives etc etc

    Coming up with a way to compare spending on social determinants of health internationally and looking at comparative health outcomes are analytic tasks well outside my skill level. But such analysis could be the beginning of the serious discussion about health improvement in this nation that is already a few decades past due.

    I hope you keep this up. Someone once said if we do what we have always done, we will get what we always got. I am afraid too much of the HCE literature just admires the complexity of our HCE dilemma without adding significant enough insight to illuminate new paradigms. These new paradigms that might be challenging to measure with the same precision as the standard data sets on HCE, but some of them may lead to far more dramatic insight and progress.

  3. Pingback: MedOTC » Blog Archive » Letting the information Speak: A Brand New Take a look at Healthcare Cost Growth