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  • Health Costs: Lessons from Europe

    By Bradley Scharf, Chair and Professor of Political Science.

    October 13, 2009

    European health systems achieve notably better outcomes than the United States on virtually every measure, including customer satisfaction, choice of physicians, life expectancy, infant mortality and medically avoidable disability and death. Yet they spend only about two-thirds of what the U.S. does, measured as a share of national income.

    To approach the lower levels of the best performing countries, we would have to reduce our spending by one-third. How might this be accomplished?

    The best systems—France, Germany, Netherlands, Sweden and Switzerland— vary greatly in organization, yet they share seven important features: First, they mandate a single, comprehensive plan of insurance benefits that covers virtually the entire population, with no exclusions for pre-existing conditions, pre-authorization for procedures, or annual and lifetime caps. If applied in the U.S., a uniform plan would eliminate roughly two-thirds of the administrative costs for insurance companies plus about three-fourths of the administrative costs of hospitals and physicians. It would also eliminate tens of thousands of jobs for insurance company bureaucrats and cover more than one-third of our cost-cutting goal.

    Second, the best systems shift the emphasis in healthcare delivery toward more efficient prevention and early intervention. They remove barriers to preventive care, providing insurance coverage for all citizens and by imposing very low co-pay requirement or avoiding them altogether. They train a much larger share of physicians in primary care. Most fee-for-service payments to physicians are replaced by a salary or a compensation rate that reflects the number of people on their service lists. Instead of earning more by providing more costly services, physicians maximize their earnings by keeping their customers healthy and by providing good service, timely exams and treatment to reduce health risks.

    This more inclusive and effective emphasis on prevention and early intervention accounts for roughly one-fourth of the cost gap.

    Third, overall physicians’ incomes are notably lower than in the U.S. Specialists’ incomes are roughly in line with the incomes of primary care physicians, roughly four times the median income for all working people. In the U.S., some specialists earn seven to eight times the median income. Moderating physicians’ incomes could close the cost gap by as much as 15 percent.

    Fourth, pharmaceutical costs are lower because public and private nonprofit insurance plans negotiate prices. Tax laws discourage spending for marketing. Several countries prohibit advertising for prescription drugs. Lower drug costs account for another 15 percent of the cost gap.

    Fifth, most European systems curb the use of expensive medical technology by limiting the capital expenditures of hospitals and requiring stringent trials for diagnostic procedures. The cost benefits may explain 6 percent of the cost gap.

    Sixth, most European countries are far ahead of the U.S. in introducing electronic medical records in a single format on an interconnected network of all providers. And hospitals are given greater responsibility for monitoring physicians. Consequently, European systems have a lower rate of medical errors and spend less to remedy mistakes.

    Seventh, European systems minimize malpractice costs by mandating best practices, processing claims in medical courts conducted by medically trained judges. Adopting European practices might reduce our overall cost gap by no more than 1.5 percent.

    Imitating the best of the European systems could reduce U.S. health spending by one-third and approach the levels of the world’s best heath care systems, while achieving much better results for Americans.

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