Mistaken Notions about Health Care Reform from McKinsey and Dartmouth

 In his article on health care reform in the April 2nd New England Journal of Medicine, John Iglehart said: “Seemingly to a person, they (the Obama team) share Orszag’s belief that, given the competitive environment created by globalization and the lack of evidence that spending more on health care necessarily results in higher-quality care, we must put a stop to the pattern of health care expenditures’ growing far more rapidly than wages and the overall economy. A recent study by the McKinsey Global Institute estimated that the United States spends $643 billion more every year on health care than its peer industrialized countries, after adjustment for wealth.”  Both notions need careful re-examination.

NOTION #1    More spending does not “necessarily” result in higher-quality.  (No, it actually does!)

This statement is straight from two Annals of Internal Medicine papers about regional variation in health care (“necessarily” is the catch word, inserted by the editors).  It divided the nation into five quintiles.  Nothing was “necessarily” better, nor was anything necessarily worse among the five, because although hospital regions were collected into each quintile based on their levels of Medicare spending (so that was similar), these regions were dissimilar for total spending and everything else.  As a result, the average values in each quintile were “average,” and nothing was necessarily better. Yet, as I reported in Health Affairs in December, a positive relationship between TOTAL health care spending and quality is readily observed among states.


 It’s clear from the comparative studies that health care is better in parts of the US where spending is greater.  Nonetheless, the idea that “more is less,” or at least “not necessarily more,” is fixed in the minds of policy makers.


NOTION #2    Relative to GDP, US spending exceeds the OECD trend by $634B because of volume of service.  (No, it’s price!)


In a draft of our 2003 Health Services Research paper, which was later shortened so it wasn’t in the final, Tom Getzen and I said: “Rather than resulting from excessive numbers of personnel, it appears that the greater health care spending in the U.S. is a function of higher prices and wages.” (The supporting data are still in the paper.)


A decade earlier, Mark Pauly showed that, when labor costs in OECD countries were adjusted to US wages and these were compared with GDP, health care spending was actually lower in the US relative to GDP than in many other countries.  He summed it up by saying, “When politicians and policymakers ask, ‘How does Germany (or Canada or the United Kingdom) do it?’ a large part of the explanation for a lower GNP share is that they pay health professionals less.”


Gerry Anderson drove this point home in his 2003 paper, “It’s The Prices, Stupid: Higher health spending but lower use of health services adds up to much higher prices in the United States than in any other OECD country.”


Why McKinsey Global failed to be aware of the important relationships between expenditures, volume-of-service and prices is a mystery, but it feeds the false notion that the higher spending in the US is due to an excessive volume of service, while it is predominantly higher prices. 


Both of these notions are prominent within the rhetoric of health care reform, and both will have to be better understood if the health care reform that unfolds is to be coherent and workable.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s