The question of why we have not yet been able to provide adequate health care to everyone in the world leads straight into a conceptual and ethical thicket from which there is no clear escape. The answer is dictated in part by how we define adequate, which varies from country to country. The answer is also determined by a nation’s belief system. Does providing an “adequate” level of care merely mean making sure that there is a minimum level of care below which no one in society is permitted to fall—while wealthier individuals have the option of purchasing superior care? Or should all members of society, rich and poor, have the same “adequate” health care experience in case of illness, as it would be in a purely egalitarian health care system?

There is no clear-cut answer to these questions, as they involve pure value judgments. Still, it might be possible to guarantee everyone on Earth at least a minimal level of adequate health care if several conditions were met. First, the income and profit aspirations of health care providers, be they drug companies, doctors, or hospitals, must be modest enough to allow for moderate pricing of services. Second, health care must be provided in a cost-effective manner. And third, the definition of adequate must not be so ambitious as to make its implementation prohibitive from a political perspective.

These are stringent conditions, highly desirable in theory but hard to attain in practice. To understand the hurdles that must be conquered before we can reach these goals, it helps to start with a primer on the flow of money and resources within the world’s health care systems.

The social and economic objectives of health systems

A nation’s health system is best thought of as a bazaar in which the providers of medical care (doctors, nurses, suppliers of medical devices and drugs, etc.) deliver a variety of goods and services to patients; these goods and services are reflected in the nation’s GDP. Health policy debates usually focus on generalized claims that health care providers can book as revenue (health spending per capita or as a percentage of GDP, for example). Much less attention is paid to the counterflow of real resources—that is, the “adequate health care” that moves from providers to patients.

Most health care providers have assumed that there is a tight correlation between health spending and health care, implying that cost controls must always come at the expense of patients. Given that assumption, for example, and because the United States spends more than twice as much per capita on health care resources than most other Organisation for Economic Cooperation and Development (OECD) nations, it was natural to believe that the United States must have the best health care in the world because it provides more health care to patients.

However, the last two decades of health services research have destroyed that assumption. In his 1993 paper “US health care costs: The untold true story,” ¹ University of Pennsylvania economist Mark Pauly demonstrated that while the United States spends significantly more on health care per capita than do Europeans nations, the latter actually devote more real resources per capita. They employ a larger health workforce per capita and deliver more physician visits, hospital days, and prescription drugs than does the United States.

Higher prices—that is, higher provider incomes—and inefficiencies account for most of this differential. A 1996 McKinsey Global Institute ² report found that, in comparable dollars, Americans received $390 fewer real health care goods and services in 1990 than did Germans, even though the United States spent $1,000 more per capita on health care. The researchers reported that Americans spent $737 more per capita that year for the same goods and services (due to higher prices), $360 more on administrative overhead, and an extra $256 on “other items” that couldn’t be specifically identified. In a 2005 paper entitled “It’s the prices, stupid,” Gerard Anderson and other researchers ³ came to the same conclusions regarding health care spending and care, as have numerous other studies.

The higher cost of health care in the United States has much to do with the high quality of life that the providers of health care can derive from its provision. In general, the US health care sector has been structured to give relatively more weight to the quality of life of providers and less to guaranteeing adequate care to all members of society. America has achieved this lopsided “balance” by fragmenting, and thus weakening, the demand side of the health system. In other nations, the payment side has been given more market power, often by concentrating buying power in the hands of government bodies. There it is easier to guarantee everyone access to an “adequate” package of health care, but the providers of health care are paid less.

To be sure, the larger payments made to the providers of medical products in the United States have facilitated more rapid technical innovation over the long run. But, as the Congressional Budget Office pointed out in a recent study, those innovations also appear to be a major cost driver in modern health systems and have led policy makers to question whether the added benefits from the innovations typically justify their added cost.

Lack of cost effectiveness

Economists measure the cost effectiveness of health care by the cost of achieving a given health care outcome—for example, lowering blood pressure by given numbers of points, or adding one “quality-adjusted life year” (QALY) to a patient’s life.⁴ A treatment that minimizes that cost is said to be cost effective. Closely related is the idea of maximizing the value of medical treatments per dollar spent.

The cost effectiveness of medical treatments is driven in part by the amount of administrative overhead loaded onto that treatment, and it is safe to assert that no other country loads as much administrative cost on medical treatments than does the United States.

Commercial insurers in the United States that serve employers tend to have health benefit ratios averaging 83 percent,⁵ which means that 17 percent of the premiums collected are not used to provide care for the insured. In the market for individually purchased insurance, these benefit ratios are actually considerably lower. The costs that employers incur for providing health benefits must also be added to this overhead. Physicians and hospitals are paid through many different insurance policies, each with its own fee levels, benefit exclusions, and rules, adding to the provider’s administrative burden. The Johns Hopkins health system, for example, deals with about 700 distinct insurance carriers, each with its own rules. The Duke University health system employs close to 900 billing clerks. The administrative burden shouldered by American providers is greater by far than that in any other country. Finally, one should include in administrative costs the value of the time patients must devote to claims processing, a good part of which in the United States is still paper based. Most other nations now have fully electronic payment systems.

Health services research during the past two decades has discovered huge variations in the practice style of physicians across regions and even across doctors practicing in a single hospital. These variations can be found in every country, but they seem most pronounced in the United States.

Pioneering research by John H. Wennberg and his associates at Dartmouth, who report their work in the Dartmouth Atlas of Health Care, found that Medicare spending per capita (after adjusting for interregional prices, age, gender, and health status) varies by a factor of over 2.5 across the United States. There are no commensurate variations in the quality of health care, clinical outcomes, or patient satisfaction. Some researchers have even detected a negative correlation between Medicare spending per capita and quality of care.

Such practice variations occur not only across larger regions within the United States but also across smaller regions within a single state. One example is New Jersey, where Medicare spending per beneficiary in his or her last two years of life in some hospital markets is not only three times the national average but three times the level in other hospital market areas within that state.

Neither the US Congress nor the private-insurance industry has shown much interest in inquiring into the reasons behind these enormous variations, or whether they can be justified on clinical grounds. Nor has the medical profession ever felt compelled to justify these variations to the rest of society. Long before one can answer whether it is possible to provide adequate health care to all, conscientious medical practitioners must help policy makers identify which practices are actually cost effective. It is, in effect, the profession’s moral obligation to the rest of society.

What level of cost-effective health care is adequate?

After the preceding primer on the allocation of real and financial resources in health care and the idea of cost effectiveness, we may now return to the question of whether it is possible to provide adequate care to everyone. The exhibit (on the next page) illustrates the conceptual issues raised by that question.

The upward-sloping line represents the quality of life supply curve offered by a nation’s health system to its citizens. QALYs are represented on the horizontal axis. This number can rise even if a medical intervention does not prolong the patient’s actual life, so long as that intervention at least enhances the quality of the patient’s expected remaining life years. The vertical axis shows the incremental costs associated with supplying ever more expensive QALYs. Thus, immunization during childhood can supply more QALYs quite cheaply (point A on the line), while additional life years (or months) bought for terminally ill patients with highly expensive drugs can be quite costly (point B or C).

Medical practices that purchase additional QALYs at a point above the solid curve are not cost effective in the sense that, with more efficient medical practices, the same QALYs ought to be available at a lower incremental cost. This would occur, for example, if surgery were performed even though conservative (and more cost effective) medical management would yield the same outcome. As was noted in the previous section, large sections of the US health system appear to provide QALYs at well above the cost-effective solid curve.

Suppose now that a nation’s health system was managed so cost effectively that all QALYs would lie on the solid supply curve. How then would we define an “adequate” level of health care? And should such a level serve only as a floor defining the minimum health care that will be guaranteed to everyone in society, or should it also define the ceiling above which the system will not buy added QALYs for anyone?

In very poor, developing nations, close to 90 percent of total health spending comes out of patient pockets. Thus, there really is no “adequate” level of health care beneath which no one is permitted to fall. Instead, people purchase added QALYs at prices all along the supply curve, depending on their ability to pay, and many must go without any health care whatsoever. As part of that debate on what is “adequate” in health care, one could imagine a global foreign-aid initiative in which the world’s high-income countries would commit sufficient financial resources to provide an adequate (as defined by those same high-income nations) level of health care for all people on Earth. Such an initiative may be possible in an era of global economic boom. It is unlikely to come forth in the far more uncertain years ahead.

At the other extreme, in the developed nations, usually only an average of 15 percent or so of total health spending is paid out of pocket by patients. Here the level of health care regarded as “adequate” tends to be fairly high up on the QALY supply curve. Even in those rich countries, however, society must ask itself first whether there ought to be an upper limit to the price at which added QALYs would be bought for anyone (for example, point C in the exhibit); and, second, whether that maximum price ought to be the same for every member of society, rich and poor. These questions will be hotly debated in the coming decade in the United States and elsewhere, if not explicitly, then in code words—for example, letting “the market” allocate health care resources. As should be clear to anyone, markets allocate resources to those individuals who are willing and able to bid the highest prices for them. They ration resources by income class.

¹ Mark V. Pauly, “US health care costs: The untold true story,” Health Affairs, 1993, pp. 152–9.
² Health care productivity, McKinsey Global Institute, October 1996.
³ Gerard F. Anderson, Uwe E. Reinhardt, Peter S. Hussey, and Varduhi Pterosyan, “It’s the prices, stupid: Why the United States is so different from other countries,” Health Affairs, 2003, pp. 89–105.
⁴ A QALY, or quality-adjusted life year, is a measure that takes into account both the quantity and quality of life resulting from a medical intervention. It can increase even if a medical intervention does not prolong life but merely enhances the quality of an unchanged remaining lifespan.
⁵ See PULSE, Sherlock Company, September 2008.

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