Is American health care uniquely inefficient?

In this paper, we address two distinct questions about the efficiency of U.S. healthcare expenditures. First, does U.S. health care display inferior productive efficiency—that is, given a bundle of factor inputs like physicians, nurses, hospital beds, and capital, is the aggregate impact of health care in the United States less than in other countries? This question is surprisingly difficult to answer. Cross-country comparisons of expenditures and health outcomes are common but are also of limited value because of our inability to control adequately for underlying health differences across countries—for example, that Americans are more likely to have diabetes or to be obese compared to the English (Banks, Marmot, Oldfield, and Smith, 2006). Micro-level analyses of specific treatments for comparable patients across countries are free of some of the defects of more aggregated comparisons, and they suggest that while nearly all countries fall well short of ideal on measures of productive efficiency, the United States healthcare system sometimes (but not always) lags behind. Common explanations have included fragmentation of care (as Cebul, Rebitzer, Taylor, and Votruba argue in this issue), higher administrative costs, and patterns of care that vary inappropriately with race, geography, and financial barriers. Second, is U.S. healthcare spending allocatively efficient compared to other countries—that is, do health benefits from the marginal dollar spent on health care consistently exceed the opportunity cost of other goods that might be provided—raising teachers’ salaries, improved insurance coverage for Iraq war veterans, or even upgrading to a BMW 5 Series? Some degree of allocative inefficiency is inevitable in any healthcare system because insurance for medical care causes overutilization due to moral hazard (Pauly, 1968). But both the very high level and rate of growth of U.S. health spending suggests that it experiences a unique degree of allocative inefficiency, even when compared to other high-income countries. The fundamental cause is a combination of high prices for inputs, poorly restrained incentives for overutilization, and a tendency to adopt expensive medical innovations rapidly, even when evidence of effectiveness is weak or absent. As we argue below, the distinction between allocative and productive efficiency can make it easier to understand the consequences of different healthcare reforms, which often address one type of inefficiency but have limited or unintentional effects on the other. PMC ID: PMC2659297 (September 2008)