HCM 4050 Module 2 Demand for Health Paper Example

Similar Use, Double the Spending, Shorter Lives: Reading the Demand for Health Across Countries and Across Incomes

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B.S. in Healthcare Management, Thomas Edison State University

HCM-4050: The Financing and Economics of Healthcare Delivery

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Month Day, Year

Similar Use, Double the Spending, Shorter Lives: Reading the Demand for Health Across Countries and Across Incomes

A common explanation for high American health spending is that Americans simply use more care. If that were true, the demand side of the market would be the place to look for savings. This paper tests that explanation. It separates the demand for health from the demand for healthcare, compares American use of care and the prices paid for it with those of ten wealthy peers, and examines how income and social class shape the risk factors that drive demand in the first place. It closes with what these findings mean for a composite community hospital in Trenton, New Jersey, whose board is preparing its next three-year community health plan.

Health Versus Healthcare

Grossman (1972) proposed that people do not want medical care for its own sake. They want health, which he treated as a stock of capital that wears down with age and can be maintained or rebuilt through investment. Medical care is one input into that investment, along with diet, exercise, sleep and time; the demand for care is therefore derived from the demand for health. In his model, people with more education are more efficient producers of health, getting more health out of the same inputs, and higher wages raise the value of healthy time, which raises the demand for health itself.

The distinction matters for comparing countries. A nation can spend heavily on medical care while producing less health if its population's risk factors are worse, if its care is priced higher, or if much of its spending goes to activities that do not produce health. Looking only at the quantity of care used will miss all three.

What Cross-Country Data Show

Papanicolas et al. (2018) set American figures beside those of ten other wealthy nations, mostly using data from 2016. The United States spent 17.8% of its gross domestic product on health care, while the others spent between 9.6% and 12.4%. Yet on most measures of use, Americans looked ordinary. Hospital discharges for heart attack, pneumonia and chronic lung disease, and rates of hip and knee replacement, were similar to the others; the supply of physicians and nurses per person was comparable. Americans did use more imaging, with 118 MRI scans and 245 CT scans per 1,000 people. The large differences lay in prices and administration: per capita drug spending of $1,443 against a range of $466 to $939 elsewhere, generalist physician salaries well above those abroad, and administrative costs taking 8% of spending compared with 1% to 3%.

The authors concluded that the United States spent about twice as much as its peers while using care at broadly similar rates, and that prices of labor and goods, including drugs, along with administrative costs, explained much of the gap. In demand terms, the American paradox is not mainly about quantity demanded. It is about the price paid for each unit and the share of spending that never reaches a patient.

Outcomes Differ Even When Use Does Not

Similar use did not buy similar results. In the same comparison, the United States had the shortest life expectancy among the eleven, at 78.8 years, along with the worst infant mortality, 5.8 deaths per 1,000 live births against an average of 3.6. Some risk factors were better in the United States; daily smoking was second lowest. Others were worse; 70.1% of American adults were overweight or obese, the highest share in the group. These numbers suggest that the American disadvantage lies partly in the population's underlying health, which the Grossman framework would attribute to the many inputs to health outside the clinic, and partly in gaps in coverage, since the United States was the only country in the comparison without near-universal insurance.

Social Class and Population Risk

Within the United States, the demand for health and the ability to produce it vary sharply by income. Chetty et al. (2016) linked tax records to death records for adults aged 40 to 76 from 2001 to 2014. The gap in life expectancy between the richest 1% and the poorest 1% was 14.6 years for men and 10.1 years for women. Between 2001 and 2014, life expectancy rose by more than two years for the top 5% of earners but barely changed for the bottom 5%. The authors also found that life expectancy among low-income people varied widely across places, and was higher in areas with healthier behaviors and higher local spending, rather than tracking access to medical care alone.

These findings fit the demand-for-health model. Lower-income households face higher risk from smoking, obesity and stress, have less time and money to invest in health, and often live where healthy choices are harder to make. Their demand for medical care may be high, because they are sicker, while their production of health remains low. Raising their health therefore depends on more than access to clinics.

Implications for a Trenton Hospital

For the composite hospital's community health plan, three lessons follow. First, the hospital's own prices and administrative costs are part of the national spending problem; a plan that promises lower community costs while ignoring the hospital's prices will not be credible. Second, because outcomes depend heavily on risk factors outside the clinic, the plan should invest in a small number of nonclinical inputs to health where the evidence is strongest, such as smoking cessation and diabetes prevention offered in neighborhoods rather than only on campus. Third, the plan should be targeted. Trenton's lowest-income census tracts carry most of the city's preventable admissions, and resources placed there will produce more health per dollar than resources spread evenly.

The plan should also measure health, not only services. Counting screenings delivered describes healthcare demand met; tracking changes in smoking rates, blood pressure control and avoidable admissions in target neighborhoods describes health produced.

Conclusion

Americans do not use far more care than people in other wealthy countries; they pay far more for it and get less health in return. The demand for health, shaped by income, education and place, explains much of the outcome gap, while prices and administrative costs explain much of the spending gap. A hospital planning its community role can act on both, by controlling its own costs and by investing in health where the need is greatest.

References

Chetty, R., Stepner, M., Abraham, S., Lin, S., Scuderi, B., Turner, N., Bergeron, A., & Cutler, D. (2016). The association between income and life expectancy in the United States, 2001-2014. JAMA, 315(16), 1750-1766. https://doi.org/10.1001/jama.2016.4226

Grossman, M. (1972). On the concept of health capital and the demand for health. Journal of Political Economy, 80(2), 223-255. https://doi.org/10.1086/259880

Papanicolas, I., Woskie, L. R., & Jha, A. K. (2018). Health care spending in the United States and other high-income countries. JAMA, 319(10), 1024-1039. https://doi.org/10.1001/jama.2018.1150