Class 1 — The U.S. health care paradox

Thursday, August 27

This recap comes from a recording of class, transcribed with Whisper and summarized with Claude, with a light edit from me. It’s meant as a convenience rather than a careful document, so the phrasing will sometimes be a little off. If something here looks wrong, please tell me and I’ll fix it.

What we covered

Course logistics, then the motivation for the class. The U.S. spends more than anyone, leads the world on medical innovation, and still does poorly on a lot of basic health outcomes. Most of the class was about why those sit together, and why the usual one-line explanations don’t hold up. We also ran our first check-in and poll in Commons.

Key points

  • Life expectancy tracks how wealthy a country is. The U.S. takes the largest GDP gains in the G7 without the matching gain in life expectancy.
  • Whether the system is good depends a lot on who you are. With good insurance, near a hospital with the right capacity, it may be the best care in the world. Without that access, the same technology never gets deployed.
  • Inefficiency and poor quality are different problems. You can be quite inefficient and still deliver very good care.
  • Maternal and infant mortality are where we look worst, and part of the reason is who they happen to. Births are concentrated among lower-income households, Medicaid is the largest payer for births, and access there is most limited.
  • None of the common explanations carries much weight on its own.
    • We’re less healthy. We do have more obesity and cardiovascular disease, though we smoke and drink considerably less, and it doesn’t explain the spending.
    • We overuse care. This doesn’t really hold up. Japan uses far more imaging than we do, and we aren’t the heaviest user of everything.
    • Physicians are paid too much. They are paid well, but the margin over other high-paying work here looks like the margin in other developed countries.
    • Fraud. Real, and visible right now in the Medicare Advantage settlements, though it’s a small share of total spending.
    • Administrative waste. Real and large. Every provider deals at once with many payers running different rules.
  • Prices are the main answer. For the same procedure you pay far more here than in other countries.
  • Six things make health care interesting to an economist, and they’re all present at once. Heterogeneous products, asymmetric information between patient and physician, unobservable quality, unpredictable need, insurance dulling the incentive to shop, and adverse selection.
  • Health care isn’t even an experience good, since you often can’t judge the quality even after you’ve received it. In the induction example, everyone comes out fine, the mother reasonably calls it the best care she’s ever had, and she has no way to know whether the earlier decisions were good ones.
  • With adverse selection, the cost of insurance depends on who buys it. The airline club and the all-you-can-eat buffet turn out to be the same problem.

Clarifications and corrections

  • The Medicaid share of births. I said in class that almost half of U.S. births are covered by Medicaid. It’s closer to 40 percent, at 40.2 percent in 2024 and 41.5 percent the year before (CDC/NCHS). Medicaid is still the largest single payer for births, so the argument is unaffected. The share does vary quite a bit, from roughly 30 percent in some states to over 60 percent in Louisiana, and it’s above 75 percent for mothers under 20.
  • Elective induction. I said that elective induction raises the chance of needing a cesarean. That was the standard reading of the older observational evidence, but a later trial reversed it. The ARRIVE trial (Grobman et al., NEJM 2018) randomized low-risk first-time mothers and found a lower cesarean rate with elective induction at 39 weeks. The broader point still holds, since it was about how hard quality is to judge from the inside, but I had the direction of that particular risk backwards.
  • “It’s the prices, stupid.” I credited this to Uwe Reinhardt. He is a coauthor rather than the sole author. The full citation is Anderson, Reinhardt, Hussey, and Petrosyan, “It’s the Prices, Stupid: Why the United States Is So Different from Other Countries,” Health Affairs (2003), if you’d like the longer version of the argument.
  • Defensive medicine across countries. One of you asked how U.S. spending on malpractice and defensive medicine compares with other countries. I didn’t have a good answer then and I still don’t, and I’m not sure a clean comparison is possible, since the legal systems differ enough that there’s no apples-to-apples version of the question. On the domestic side, many states adopted tort reform over the past thirty years and the estimated effects on spending have been small. That’s why defensive medicine doesn’t make my short list of culprits, though it probably should have been on the slide of common explanations, and I’ll add it.