United States of America: Selected Issues

This Selected Issues paper on the United States examines the effect of the structure of the mortgage market on real housing activity and housing prices. The market-based financial structure has reduced the volatility of mortgage lending. Changes in the structure of the mortgage market have coincided with lower volatility of real housing activity. Regional income growth and unemployment rates have statistically significant and correct signed effects on housing prices. Tests of the relative importance of mortgage market structure and macroeconomic variables suggest an important effect from the financial structure.

Abstract

This Selected Issues paper on the United States examines the effect of the structure of the mortgage market on real housing activity and housing prices. The market-based financial structure has reduced the volatility of mortgage lending. Changes in the structure of the mortgage market have coincided with lower volatility of real housing activity. Regional income growth and unemployment rates have statistically significant and correct signed effects on housing prices. Tests of the relative importance of mortgage market structure and macroeconomic variables suggest an important effect from the financial structure.

VII. Diagnosing the High Cost of U.S. Medical Care54

1. The high cost of medical care in the United States is an important policy challenge. This has been underscored in recent federal budgets, which have emphasized the need to contain health care costs and improve the accessibility to health insurance. Indeed, total U.S. outlays on health care are currently double the OECD average as a percent of GDP, and do not appear to have yielded a commensurate gain in average health outcomes (Figure 1).

Figure 1.
Figure 1.

Total health care spending

Citation: IMF Staff Country Reports 2005, 258; 10.5089/9781451839647.002.A007

Source: OECD.

2. This paper compares U.S. and other OECD health care spending and outcomes. The analysis suggests that the U.S. experience reflects several factors. These include the high level of U.S. income per capita; income inequality; well as the as structure of the health care system, which is fragmented and provides uneven access to insurance while giving rapid services for those that can afford them.

A. Background

3. In the United States, health care services are mainly provided by the private sector. Although some health care is provided by public agencies—e.g., the Veterans Administration and the military—the vast majority of doctors and hospitals are in the private sector. This contrasts with many other OECD countries in which health care services are delivered by public agencies or by private providers that are publicly contracted.

4. Public health care insurance covers only about 25 percent of the U.S. population. This mainly reflects the Medicare system, which covers the elderly and disabled. Again, this contrasts with most other OECD countries, in which universal health insurance coverage is the norm, leaving the average ratio of public insurance coverage at 93 percent.

5. U.S. outlays for health care as a ratio of GDP is well above the OECD average. In 2002, this ratio was 15 percent, double the OECD average. The second highest ratio was 11 percent for Switzerland—the only other OECD country where the private sector plays a dominant role in the health system.

6. Despite the relatively low level of public health insurance, roughly half of total U.S. health outlays are financed by the public sector. Public health spending in the United States as a share of GDP is roughly at the OECD average (Figure 2). Two-thirds of these outlays are by the Medicare and Medicaid systems (Medicaid is a joint state-federal program that provides means-tested health and long-term care for the poor). The remaining third of public health outlays include those by programs for government employees and veterans.

Figure 2.
Figure 2.

Public health care spending in 2002

Citation: IMF Staff Country Reports 2005, 258; 10.5089/9781451839647.002.A007

Source: OECD.

7. More than three quarters of private health outlays for health services in the United States are financed via private health insurance. Private insurance—provided through employer-sponsored schemes, which receive a substantial tax advantage—finances more than seventy percent of all private spending on health. As a result, out-of-pocket payments by individuals as a share of total health spending in the United States are about 4 percentage points below the OECD average of 18.7 percent.55

8. U.S. health care spending by the public and private sectors has been growing more rapidly than in other OECD countries. The U.S. share of GDP devoted to health care increased from 9 percent in 1980 to almost 15 percent in 2002, despite a moderation of growth in the 1990s with the introduction of managed care systems. Since 2000, the growth of health spending per capita and in real terms was 6 percent, 1¼ percentage point above the OECD median (Table 1).56 Key drivers have been spending on ambulatory care and (since the 1990s) pharmaceuticals (Table 2).

Table 1.

Health Spending in OECD Countries, 1990-2002

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Source: OECD Health Database 2004, 2nd edition

Capita, national currency units at 95 GDP price level

Table 2.

Contribution of Different Spending Components to Total Health Care Costs, 1980-2002

(Level and exchange in percentage points of total health expenditures)

article image
Source: OECD Health Data 2004, 2nd edition.

1990-2000 average

9. A number of initiatives have been undertaken to contain rapidly growing health care costs. As discussed in the accompanying Staff Report, the 2003 Medicare Modernization Act (MMA) introduced a number of measures aimed at reducing costs and enhancing efficiency, as well as a new prescription drug benefit to the Medicare coverage, estimated to cost $593 billion over the 2004-2013 period (CBO, 2005). More recently, the Administration has proposed tax preferences for purchases of health insurance by low-income workers, as well as tort reform to curb defensive medicine. The last proposal for major reform of the health care system was undertaken by the Administration in 1994, which aimed at providing universal health insurance coverage while using a combination of market competition and government regulation to contain costs (Nedde, 1995). However, these proposals proved unpopular and were not adopted, indicating that a far-reaching health care reform might be also difficult to implement in the future.

10. The supply of health services in the United States is comparable to the OECD average. The number of physicians, hospital beds, nurses, and indicators of acute care per capita in the United States is around the OECD average, as is the number of high-tech equipment such as magnetic resonance imaging (MRI) and computed tomography (CT) scanners. Although the supply of high-tech medical equipment was considerably higher in the United States a decade ago, other countries appear to have reached comparable levels (Table 3).

Table 3.

Use of Medical Technology in OECD Country Health Care Systems, 1990-2001

(In numbers of units, per million population)

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Source: OECD Health Data 2004, 2nd edition.

11. Overall health indicators for the United States have improved, but remain around the OECD average(Figure 3).

Figure 3.
Figure 3.

There is scope for increasing efficiency in health care spending.

Citation: IMF Staff Country Reports 2005, 258; 10.5089/9781451839647.002.A007

Sources: CBO and OECD.

Life expectancy—a key overall indicator of health—was marginally below the average for other OECD countries in 2001-2002, although life expectancy of the elderly (i.e., those at age 65) is slightly higher (Table 4). Infant mortality was also slightly below the OECD average, but considerably worse than in a number of other industrial nations, such as Sweden, Spain, and Germany.

Table 4.

Life Expectancy in 2002

(In years)

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Source: OECD Health Database 2004, 2nd edition.

B. Analysis of High U.S. Health Care Costs

12. This section draws on the existing literature to identify possible drivers of high costs in the health system. The analysis is based on cross-country regressions and U.S. surveys of health spending and outcomes, and suggests the importance of a range of factors including higher incomes per capita, income inequality, insurance inequality, wider distribution of market power and prices, administrative complexity and costs, and limited demand rationing.

Income Levels

13. Higher income is an important factor for health care spending across countries. Studies consistently find that GDP per capita explains about 90 percent of the observed variation in health spending across OECD countries (e.g., Gerdtham and Johnsson, 2000, and Pritchett and Summers, 1997). Table 5 presents regression results that confirm this finding—GDP per capita is a significant determinant of total health care spending, even in regressions excluding the United States, or when other explanatory factors are included, such as demographic profiles.

Table 5.

Determinants of Health Spending in OECD Countries, 1999-20021

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Regressions are estimates using robust Huber/White/sandwich estimator of variance.

* indicates significance at a 10 percent level.

14. Higher income and public health spending are also associated with better health outcomes across countries. Studies have typically found that higher real income per capita and public health spending tend to increase life expectancy.57 Similar results are reported in Table 6, while obesity is also identified as a factor that drives down overall health outcomes. These findings are consistent with the U.S. Medical Expenditure Panel Survey (USMEP), which shows that individuals’ self-assessments of health are higher at middle and upper incomes (Table 7).

Table 6.

Determinants of Life Expectancy in OECD Countries, 1999-2002

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1 Regressions are estimates using robust Huber/White/sandwich estimator of variance.

2* indicate coefficients are significant at a 10 percent level.

Table 7.

United States: Self-Assessed Health Status by Income Distribution

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Income Inequality

15. There is mixed evidence regarding the impact of income inequality on health spending across countries. Income inequality (as measured by Gini indices) does not appear to be a significant determinant of total health spending in cross-country regressions. However, higher income inequality does seem to cause higher levels of public health spending, even when other variables such as GDP per capita, share of elderly in total population, and educational levels are included (Table 8).

Table 8.

Determinants of Total and Public Health Spending in OECD Countries, 1999-20021

article image

Regressions are estimates using robust Huber/White/sandwich estimator of variance.

* indicates coefficients are significant at a 10 percent level.

16. U.S. survey data also indicates that income differentials explain a rather small part of the variation in total health spending. USMEPS data suggest that total health spending per person is relatively uniform across income distribution, and is actually slightly higher for the poor, possibly reflecting their worse health status (Table 9).

Table 9.

United States: Individual Health Spending

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Source: Medical Expenditure Panel Survey

1 Uninsured refers to persons uninsured during the entire year. Public and private health insurance categories refer to individuals with public or private insurance at any time during the period; individuals with both public and private insurance and those with Tricare (Armed-Forces-related coverage) are classified as having insurance.

2 Poor refers to incomes below the Federal poverty line; near poor, over the poverty line through 125 percent of the poverty line; low income, over 125 percent through 200 percent of the poverty line; middle income, over 200 percent to 400 percent of the poverty line; and high income, over 400 percent of the poverty line.

17. However, health care financing does vary widely by personal income. The share of expenditures covered out of pocket or by private insurance schemes increases with income, while the share covered by public health care systems—Medicare, which provides health insurance to elderly and disabled and (especially) Medicaid, a program for poor—declines with income.

Structural issues

18. The structure of the U.S. health care system may also drive its high costs. It is sometimes argued that the absence of a single-payer system leaves the responsibility for controlling costs to private insurers, which may not have sufficient incentives to contain usage or prices, and also increases administrative costs.58 Moreover, the absence of universal coverage is also often argued to reduce access to preventive care, especially by low-income groups, leading to poorer health and excessive reliance on more expensive acute care (IOM, 2002). These contentions are difficult to assess in crosscountry regressions, but USMEP data suggest that insurance inequality and income inequality appear to create obstacles to access to health care (Table 10).59

Table 10.

United States: Obstacles to Receiving Health Care

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Source: Medical Expenditure Panel Survey.

1 Uninsured refers to persons uninsured during the entire year. Public and private health insurance categories refer to individuals with public or private insurance at any time during the period; individuals with both public and private insurance and those with Tricare (Armed-Forces-related coverage) are classified as having insurance.

Poor refers to incomes below the Federal poverty line; near poor, over the poverty line through 125 percent of the poverty line; low income, over 125 percent through 200 percent of the poverty line; middle income, over 200 percent to 400 percent of the poverty line; and high income, over 400 percent of the poverty line.

19. Uninsured individuals also tend to have worse health outcomes. Standard measures find that roughly 16 percent of the U.S. population are uninsured, and this share has risen recently with the increase in health cost inflation since 2000 (Figure 4).60 Studies suggest that the uninsured receive roughly half the level of care than those with health insurance (e.g., IOM, 2003), resulting in worse health outcomes and more use of high-cost acute care.

Figure 4.
Figure 4.

U.S. Health Insurance Coverage

Citation: IMF Staff Country Reports 2005, 258; 10.5089/9781451839647.002.A007

Source: Current population survey.

20. Several studies show that prices for medical services are much higher in the United States than in other countries (Anderson and others, 2003). This appears to reflect higher labor costs, especially for specialists and other professionals. As noted above, the U.S. insurance system allocates more market power to the suppliers of services than in other countries and Docteur and Oxley (2003) find that publicly controlled systems of health care financing and delivery are more effective in controlling costs.

C. Conclusions

21. The United States is an outlier among OECD countries in terms of health spending as a share of GDP. Cross-country analysis reveals that much of this reflects fundamental factors such as higher U.S. income per capita, the decentralized nature of the U.S. health care system, and non-universal insurance coverage. Since these high costs do not seem to have yielded a commensurate gain in health outcomes, there would scope for efficiency gains, possibly by reducing administrative costs and broadening health insurance coverage, or by more fundamental reforms.

References

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  • Anderson, G., P. Hussey, U. Reinhardt, and V. Petrosyan, 2003, “It’s the Prices, Stupid: Why the United States is So Different From Other Countries,” Health Affairs, Vol. 22, p. 89.

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  • Aaron, H., and W. Schwartz, 1993, “Managed Competition: Little Cost Containment Without Budget Limits,” Health Affairs, Vol. 12, pp. 20415.

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  • Congressional Budget Office (CBO), 2005, Updated Estimates of Spending for the Medicare Prescription Drug Program (Washington).

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54

Prepared by Iryna Ivaschenko

55

The purpose and scope of private health insurance varies significantly in other OECD countries (Docteur and Oxley, 2003). In particular, it is largely used to supplement publicly provided care in Belgium, Canada, Denmark, France, Germany, the Netherlands, and New Zealand, while in Australia, Ireland, Spain, and the United Kingdom it is largely used to widen the choice of providers or the speed of the delivery of care. Private health insurance is uncommon in Hungary, Japan, Korea, Mexico and most Nordic countries.

56

While empirical evidence is limited, managed care appears to have yielded one-time cost savings distributed over a several years, but to have had limited effects on the long-term growth health spending (see, for example, Aaron and Schwartz, 1993).

58

The average costs of a hospital stay is three times the OECD median, while a recent study found U.S. consumers paid 40 percent more per capita but received 15 percent fewer real health care resources compared to their German peers, with any gains in the efficiency of delivery more than offset by higher administrative costs. Compared to the United Kingdom, the U.S. system used about 30 percent more inputs per capita (see Anderson and others, 2004).

59

Insurance inequality also has been argued to be associated with unequal access to non-hospital health care (van Doorslaer and others, 2004).

60

While some of the uninsured may be eligible for government programs, few doubt that the uninsured reflect a significant share of the U.S. population.

United States: Selected Issues
Author: International Monetary Fund