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Cross national differences in health spending what do they mean?
Journal of Health Economies 6 (1987) 159-162. North-Holland
EDITORIAL Cross National Differences in Health Spending What Do They Mean?
Joseph P. NEWHOUSE The RAND Corporation, Santa Monica, Ck 90404, USA
Parkin, McGuire and Yule (hereafter PMY) (1987) are to be commended for an attempt at replication - something done all too infrequently by economists [DeWald, Thursby and Anderson (1986)J. Their results are reasonably straightforward, using more recent data, perhaps more consistent definitions, and a larger sample, the authors confirm the finding of several previous studies that, across countries, expenditure per capita on medical care is strongly related to income per capita. Moreover, although the result is somewhat sensitive to functional form, the income elasticity (at the mean) may well exceed one. In addition, they show that expenditure per capita defined using Purchasing Power Parity (PPP) is also strongly related to GDP per capita, but that the share of GDP devoted to medical care, when share is defined by PPP, appears unrelated to GDP (though with a large confidence interval). Finally, they show that expenditure on medical care is more responsive to GDP per capita than are various types of manpower and that factor shares differ substantially among countries. Despite the similarity of these results with previous work, PMY’s interpretation of the findings is quite different. In particular, they question whether the increase in expenditure represents an increase in resources, as previous work has suggested, or simply an increase in factor prices. They infer that because manpower varies less than expenditure, much of the variation is in price per unit. They are critical of the notion that medical care expenditure at the margin may be termed a luxury, i.e., a good with an income elasticity exceeding one. They also question the literature’s interpretation that the additional expenditure is buying ‘caring’ rather than ‘curing’. Finally, PMY express a number of reservations about the use of aggregate data to establish a relationship between medical care expenditure and income. Despite PMY’s numerous questions srnd criticisms 0; the literature, it is not clear that their interpretations are correct. 0167-6296/87/$3.50 @ 1987, Ekevier Science Publishers B.V. (North-Holland)
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J&s the variation in expenditurereflect primarily variationin factor prices? The evidence that manpower ratios do not strongly respond to income and that factor shares differ among countries is at best weak evidence that differences in expenditure represent differences in levels of factor prices rather than differences in real resources used in the countries. Factor shares, of course, may differ because of differences in relative prices (or government policies); one cannot infer that absolute factor price levels differ. Even more importantly, the proper price variable for this analysis is hedonic (i.e., quality adjusted), yet PMY’s implied measure is not hedonic because it treats physicians (and other health manpower as well) as homogeneous. If one used an hedonic measure of price, however, manpower ratios would probably vary more strongly with expenditure because the United States, with the highest expenditure, also has the highest percentage of specialists among its physician stock. In short, one must take account of the human capital embodied in the manpower stock rather than simply counting bodies. One can, of course, question to what degree the higher fees earned by physicians with additional training reflect additional productivity and to what degree they represent rents. Nonetheless, there can be little doubt that the additional training a specialist receives does have some positive value. For that reason the verdict on how much of the additional expenditure represents a change in factor prices and how much represents additional real resources is still not known. What dw the marginal dollar buy? T1.e prevailing view is that the additional expenditure in the high spending, high income countries buys little curing. Since this notion came into the literature more than a decade ago, additional evidence has accumulated suggesting that in the cross section (i.e., holding technology constant), additional resources in the United States buy rather little curing. In particular, the results of the Rand Health Insurance Experiment show that for the average non-aged American, the clinical effect of additional medical care induced by no cost sharing is measurable, Cat small, being concentrated among poor adults with hypertension or myopia [Brook et al. (1983), Valdez et al. (1985)]. Further analysis suggests that the lack of effect may occur because a positive clinical effect for some medical services may be offset by a negative clinical effect for other services [Lohr et al. (1986)J. Moreover, the additional dental services induced by free care do have some effect on oral health; specifically, cavities are more likely to be filled if additional dental care is sought and periodontal health is modestly better for those between the ages of 12 and 35 [Bailit et al. (1985)]. Overall, however, despite a 30 to 50 percent increase in medical care and dental services induced by free care, relatively little improvement in health outcomes was purchased. Similarly, a
J.P. Newhouse. Editorial
161
40 percent reduction in hospital admissions at one HMO had rather modest effects on health outcomes [Ware et al. (1986), Sloss et al. (198711. In addition to these experimental results, a study of the United States and the United Kingdom suggests that the additional resources in the United States do have some effects on health outcomes, for example among the elderly with renal failure [Aaron and Schwartz (198411. Nonetheless, the clinical differences between the two countries, while sufficient to allow one to reject the notion that the measurable effect of the additional care in the United States is zero, are not as striking as one might have supposed from the magnitude of the per capita expenditure differences between th& two countries. Part of the resource difference between the two countries can be attributed to considerably longer physician visits in the United States [Mechanic (1972), Marsh, Wallace and Whewell (1976), Robinson (1977)]. This additional physician time may well produce principally patient satisfaction rather than better clinical outcomes. Of course, caring and curing are not mutually exclusive; much medical care at the margin may operate simultaneously on both. For example, the rather short prolongation of life that Garber, Fuchs and Silverman (1984) found from the additional resources in the teaching wing of a hospital could bc both caring and curing. Obviously outcomes were affected, but one suspects that the additional resources may also have reassured family and relatives that ‘everything possible’ was being done. Another example is the additional expense of non-invasive imaging techniques. Such techniques permit more accurate diagnosis and treatment of some patients, but they are also less painful than earlier, invasive techniques. One should distinguish between what the marginal expenditure bu;: i? the cross section (i.e., holding technology constant) and what it buys in the time series (allowing for new technology, including new procedures). It is plausible that the marginal expenditure buys relatively more caring in the cross section than in the time series. If so, that income elasticities seem to lie somewhere near one in both the international cross section and in various nations’ time series suggests that income elasticities for both caring and curing may be near one. What is to be emphasized? PMY are at considerable pains to show that the aggregate income elasticity of medical services could be less than one. They term the estimates of income elasticity in the literature unreliable, showing that the calculated elasticity depends on functional form. Although their technical point is well taken, whether the income elasticity exceeds one is, in my view, an important but secondary issue. I would place more emphasis on the finding that the income elasticities found in international cross sections substantially exceed zero and substantially exceed the more reliable estimates from within-county
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cross sections. Surely this difference, which PMY’s results confirm, is interesting and suggestive of what the marginal resources are buying. One can quibble over a few of PMY’s points: given the large share of medical care in most countries that is publicly financed, as well as the share of private expenditure financed by insurance in some countries, one may be forgiven for not worrying excessively about the use of aggregate variables. Also, PMY argue that the wealthier countries may buy insurance instead of medical care, but this seems doubtful. Although I have not found data on out-of-pocket expenditure by country (i.e., that portion not covered by either private or public insurance), it seems likely that the United States has one of the highest proportions of out-of-pocket expenditure, as well as the highest GDP per capita, and that the United Kingdom has one of the lowest. Thus, it seems unlikely that as income rises the percentage paid out of pocket falls. But to quibble in this fashion would be to lose sight of the forest for the trees. For the most part PMY’s general confirmation of previous findings makes those findings seem even more robust, and PIMY’sadditional analyses suggest new avenues of exploration. References Aaron, Henry J. and William B. Schwartz, 1984, The painful prescription (Brookings Institution, Washington, DC). Bailit, Howard L., Joseph P. Newhouse, Robert H. Brook et al., 1985, Does more generous dental insurance coverage improve oral health?, Journal of the American Dental Association 110,701-707. Brook, Robert H., John E. Ware, Jr., William H. Rogers et al., 1983, Does free care improve adults’ health?: Results from a randomized controlled trial, New England Journal of Medicine 309, 1426-1434. DeWald, William G., Jerry G. Thursby and Richard G. Anderson, 1986, Replication in empirical economics: The Journal of Money, Credit, and Banking project, American Economic Review 76,587-603. Garber, Alan M., Victor R. Fuchs and James F. Silverman, 1984, Case mix, costs, and outcomes - Differences between faculty and community services in a university hospital, New England Journal of Medicine 310, 1231-1237. Lohr, Kathleen N., Robert H. Brook, Caren J. Kamberg et al., 1986, Use of medical care in the Rand health insurance experiment: Diagnosis- and service-specific analyses in a randomized controlled trial, Medical Care 24, suppl., Sl-S87. Marsh, G.N., R.B. Wallace and J. Whewell, 1976, Anglo-American contrasts in general practice, British Medical Journal 1, 1321-1325. Mechanic, David, 1972. General medical practice: Some comparisons between the work of primary care physiciaL,s in the United States and England and Wales, Medical Care 10,402420. Parkin, David, Alistair McGuire and Brian Yule. 1987, Aggregate health care expenditures and national income: Is health care a hrxury good?, Journal of Health Economics 6, 109127. Robinson, Derek, 1977, Primary medical practice in the United Kingdom and the United States, New England Journal of Medicine 297, 188i93. Sloss et al., 1987, Effect of a health maintenance organization on physiologic health, Annals of Internal Medicine 106, 130-138. Valdex, R., Burciaga, Robert H. Brook, William H. Rogers et al., 1985, The consequences of cost sharing for children’s health, Pediatrics 75, 952-961. Wareet al., 1986, Comparison of health outcomes at a health maintenance organization with those of fee-for-service care, The Lancet 1, 1017-1022.
EDITORIAL Cross National Differences in Health Spending What Do They Mean?
Joseph P. NEWHOUSE The RAND Corporation, Santa Monica, Ck 90404, USA
Parkin, McGuire and Yule (hereafter PMY) (1987) are to be commended for an attempt at replication - something done all too infrequently by economists [DeWald, Thursby and Anderson (1986)J. Their results are reasonably straightforward, using more recent data, perhaps more consistent definitions, and a larger sample, the authors confirm the finding of several previous studies that, across countries, expenditure per capita on medical care is strongly related to income per capita. Moreover, although the result is somewhat sensitive to functional form, the income elasticity (at the mean) may well exceed one. In addition, they show that expenditure per capita defined using Purchasing Power Parity (PPP) is also strongly related to GDP per capita, but that the share of GDP devoted to medical care, when share is defined by PPP, appears unrelated to GDP (though with a large confidence interval). Finally, they show that expenditure on medical care is more responsive to GDP per capita than are various types of manpower and that factor shares differ substantially among countries. Despite the similarity of these results with previous work, PMY’s interpretation of the findings is quite different. In particular, they question whether the increase in expenditure represents an increase in resources, as previous work has suggested, or simply an increase in factor prices. They infer that because manpower varies less than expenditure, much of the variation is in price per unit. They are critical of the notion that medical care expenditure at the margin may be termed a luxury, i.e., a good with an income elasticity exceeding one. They also question the literature’s interpretation that the additional expenditure is buying ‘caring’ rather than ‘curing’. Finally, PMY express a number of reservations about the use of aggregate data to establish a relationship between medical care expenditure and income. Despite PMY’s numerous questions srnd criticisms 0; the literature, it is not clear that their interpretations are correct. 0167-6296/87/$3.50 @ 1987, Ekevier Science Publishers B.V. (North-Holland)
160
J.P. Newhouse,
Editorial
J&s the variation in expenditurereflect primarily variationin factor prices? The evidence that manpower ratios do not strongly respond to income and that factor shares differ among countries is at best weak evidence that differences in expenditure represent differences in levels of factor prices rather than differences in real resources used in the countries. Factor shares, of course, may differ because of differences in relative prices (or government policies); one cannot infer that absolute factor price levels differ. Even more importantly, the proper price variable for this analysis is hedonic (i.e., quality adjusted), yet PMY’s implied measure is not hedonic because it treats physicians (and other health manpower as well) as homogeneous. If one used an hedonic measure of price, however, manpower ratios would probably vary more strongly with expenditure because the United States, with the highest expenditure, also has the highest percentage of specialists among its physician stock. In short, one must take account of the human capital embodied in the manpower stock rather than simply counting bodies. One can, of course, question to what degree the higher fees earned by physicians with additional training reflect additional productivity and to what degree they represent rents. Nonetheless, there can be little doubt that the additional training a specialist receives does have some positive value. For that reason the verdict on how much of the additional expenditure represents a change in factor prices and how much represents additional real resources is still not known. What dw the marginal dollar buy? T1.e prevailing view is that the additional expenditure in the high spending, high income countries buys little curing. Since this notion came into the literature more than a decade ago, additional evidence has accumulated suggesting that in the cross section (i.e., holding technology constant), additional resources in the United States buy rather little curing. In particular, the results of the Rand Health Insurance Experiment show that for the average non-aged American, the clinical effect of additional medical care induced by no cost sharing is measurable, Cat small, being concentrated among poor adults with hypertension or myopia [Brook et al. (1983), Valdez et al. (1985)]. Further analysis suggests that the lack of effect may occur because a positive clinical effect for some medical services may be offset by a negative clinical effect for other services [Lohr et al. (1986)J. Moreover, the additional dental services induced by free care do have some effect on oral health; specifically, cavities are more likely to be filled if additional dental care is sought and periodontal health is modestly better for those between the ages of 12 and 35 [Bailit et al. (1985)]. Overall, however, despite a 30 to 50 percent increase in medical care and dental services induced by free care, relatively little improvement in health outcomes was purchased. Similarly, a
J.P. Newhouse. Editorial
161
40 percent reduction in hospital admissions at one HMO had rather modest effects on health outcomes [Ware et al. (1986), Sloss et al. (198711. In addition to these experimental results, a study of the United States and the United Kingdom suggests that the additional resources in the United States do have some effects on health outcomes, for example among the elderly with renal failure [Aaron and Schwartz (198411. Nonetheless, the clinical differences between the two countries, while sufficient to allow one to reject the notion that the measurable effect of the additional care in the United States is zero, are not as striking as one might have supposed from the magnitude of the per capita expenditure differences between th& two countries. Part of the resource difference between the two countries can be attributed to considerably longer physician visits in the United States [Mechanic (1972), Marsh, Wallace and Whewell (1976), Robinson (1977)]. This additional physician time may well produce principally patient satisfaction rather than better clinical outcomes. Of course, caring and curing are not mutually exclusive; much medical care at the margin may operate simultaneously on both. For example, the rather short prolongation of life that Garber, Fuchs and Silverman (1984) found from the additional resources in the teaching wing of a hospital could bc both caring and curing. Obviously outcomes were affected, but one suspects that the additional resources may also have reassured family and relatives that ‘everything possible’ was being done. Another example is the additional expense of non-invasive imaging techniques. Such techniques permit more accurate diagnosis and treatment of some patients, but they are also less painful than earlier, invasive techniques. One should distinguish between what the marginal expenditure bu;: i? the cross section (i.e., holding technology constant) and what it buys in the time series (allowing for new technology, including new procedures). It is plausible that the marginal expenditure buys relatively more caring in the cross section than in the time series. If so, that income elasticities seem to lie somewhere near one in both the international cross section and in various nations’ time series suggests that income elasticities for both caring and curing may be near one. What is to be emphasized? PMY are at considerable pains to show that the aggregate income elasticity of medical services could be less than one. They term the estimates of income elasticity in the literature unreliable, showing that the calculated elasticity depends on functional form. Although their technical point is well taken, whether the income elasticity exceeds one is, in my view, an important but secondary issue. I would place more emphasis on the finding that the income elasticities found in international cross sections substantially exceed zero and substantially exceed the more reliable estimates from within-county
162
J.P. Newhouse, Editorial
cross sections. Surely this difference, which PMY’s results confirm, is interesting and suggestive of what the marginal resources are buying. One can quibble over a few of PMY’s points: given the large share of medical care in most countries that is publicly financed, as well as the share of private expenditure financed by insurance in some countries, one may be forgiven for not worrying excessively about the use of aggregate variables. Also, PMY argue that the wealthier countries may buy insurance instead of medical care, but this seems doubtful. Although I have not found data on out-of-pocket expenditure by country (i.e., that portion not covered by either private or public insurance), it seems likely that the United States has one of the highest proportions of out-of-pocket expenditure, as well as the highest GDP per capita, and that the United Kingdom has one of the lowest. Thus, it seems unlikely that as income rises the percentage paid out of pocket falls. But to quibble in this fashion would be to lose sight of the forest for the trees. For the most part PMY’s general confirmation of previous findings makes those findings seem even more robust, and PIMY’sadditional analyses suggest new avenues of exploration. References Aaron, Henry J. and William B. Schwartz, 1984, The painful prescription (Brookings Institution, Washington, DC). Bailit, Howard L., Joseph P. Newhouse, Robert H. Brook et al., 1985, Does more generous dental insurance coverage improve oral health?, Journal of the American Dental Association 110,701-707. Brook, Robert H., John E. Ware, Jr., William H. Rogers et al., 1983, Does free care improve adults’ health?: Results from a randomized controlled trial, New England Journal of Medicine 309, 1426-1434. DeWald, William G., Jerry G. Thursby and Richard G. Anderson, 1986, Replication in empirical economics: The Journal of Money, Credit, and Banking project, American Economic Review 76,587-603. Garber, Alan M., Victor R. Fuchs and James F. Silverman, 1984, Case mix, costs, and outcomes - Differences between faculty and community services in a university hospital, New England Journal of Medicine 310, 1231-1237. Lohr, Kathleen N., Robert H. Brook, Caren J. Kamberg et al., 1986, Use of medical care in the Rand health insurance experiment: Diagnosis- and service-specific analyses in a randomized controlled trial, Medical Care 24, suppl., Sl-S87. Marsh, G.N., R.B. Wallace and J. Whewell, 1976, Anglo-American contrasts in general practice, British Medical Journal 1, 1321-1325. Mechanic, David, 1972. General medical practice: Some comparisons between the work of primary care physiciaL,s in the United States and England and Wales, Medical Care 10,402420. Parkin, David, Alistair McGuire and Brian Yule. 1987, Aggregate health care expenditures and national income: Is health care a hrxury good?, Journal of Health Economics 6, 109127. Robinson, Derek, 1977, Primary medical practice in the United Kingdom and the United States, New England Journal of Medicine 297, 188i93. Sloss et al., 1987, Effect of a health maintenance organization on physiologic health, Annals of Internal Medicine 106, 130-138. Valdex, R., Burciaga, Robert H. Brook, William H. Rogers et al., 1985, The consequences of cost sharing for children’s health, Pediatrics 75, 952-961. Wareet al., 1986, Comparison of health outcomes at a health maintenance organization with those of fee-for-service care, The Lancet 1, 1017-1022.