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The U.S. Versus the World Healthcare Cost Gap

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Lean thinking dictates that we try to turn any "problem" (or need, however big, however vague) into an actionable problem that can be analyzed. All problems come down, one way or another, to SQDCM (Safety, Quality, Delivery, Cost, Morale). How can we identify a gap (between the way things are and the way we need or want them to be) that we can analyze?

Furthermore, as you know, we try to never jump to conclusions, to solutions. That understanding is quite widespread now in the Lean Community, in theory if not practice. What is less understood is that, not only do we not jump to solutions, we don't even jump to the five whys. First, we try to size up the situation. Define the problem. Identify the "gap." That’s all I'm going to try to do with this discussion - identify a gap, not go anywhere near prescribing a solution, and stopping shy of even doing the full causal analysis. We'll content ourselves with merely identifying the factors that must define the gap. That's all.

Most discussions of the U.S.A. healthcare problem focus on the famous factoid, "100,000 deaths caused by less-than-the-best health care" provision. We should note: (1) that data is ten years old so the situation is arguably worse today than it was then, and (2) the data was a very rough generalization - the actual data was "... between 44,000 and 98,000 deaths...", a figure that is routinely rounded up to 100,000.

I am one who often argues against starting with the cost equation (the "C" of SQDCM). Quality is usually a much better lever to use to rally the troops. We all know that poor quality ultimately results in higher cost. We also know that shortsighted cost-cutting usually results in poor quality. A downward spiral.

In the case of U.S. healthcare, however, the problem that is uniquely America's is cost. All the waste and operational problems that we - including us lean enthusiasts - love to highlight are shared roughly equally around the world. By "around the world" I am talking about ALL countries that would be even remotely comparable to the U.S. in terms of socio-economic structure, including Canada, Australia, New Zealand, the United Kingdom, Japan, Germany, northern Europe, and Taiwan. I have visited hospitals in most of those countries (and others) and, on the surface at latest, the amount of waste and problems at the operational level appear essentially the same.

Those countries mostly pay roughly 8% of their GNP on healthcare (Germany and some northern European countries are higher, a little above 10%). Americans pay over 16% and rising. That is, Americans pay double, a big difference. It is a difference that also sits there as an easily doable gap analysis.

In all the debate, have you seen anyone tackle the problem by even discussing this gap, much less really analyzing it? I have seen, in academic circles, reams of data parsing the overall healthcare costs of various countries, but nothing in the way of a simple gap analysis that might shed some light - just a little please - on the U.S. national debate.

Total Healthcare Costs as Percent of GDP

We lean folks take a certain kind of pleasure in pointing out the tremendous amount of waste and the poor quality that we can easily see in our hospitals. It is true that tremendous waste exists. But it would be simply incorrect to state that that waste is the cause of the U.S.A. healthcare crisis: All those other countries have the essentially same amount of visible waste in their hospitals! Walk through a hospital in Australia or Canada or Japan. The same typical problems exist. Errors, long lengths of stay, unnecessary admissions. Exactly the same. Indistinguishable.

But, they pay half as much. Each of those countries pays half as much, for better overall outcomes. And with the same (roughly) amounts of "waste" in their operational systems.

There is something seriously broken in our health system at the macro level. I've read a good bit about this topic, it is at the core of the national healthcare debate, yet all we hear are people screaming on both sides with no one talking about the problem. Or, not, at least, talking about this Gap.

The U.S. is the single outlier. So there must be something quite specific going on. Many people have their "pet" special cause. Some love to point to doctor pay. Others to exorbitant insurance cost due to frivolous lawsuits. Let's say for our purposes here that there is at least SOME validity to all those pet causes. But, let's also take a closer look and not pass judgment (yet) on the relative value of the various causes.

Certainly the causes of the Gap must be many and complex. But, surely we can identify a few buckets of cost, categories of activities where the costs lie. I am no expert in health care cost so am not the most qualified person to take on the analysis with the seriousness it deserves. But, here are my five buckets of cost that account for the Gap. I will try to be non-denominational - there will be much disagreement on the relative contributions of the buckets, but the idea I'm putting forth here is that the buckets together should account for essentially 100% of the cost gap. (Or, conversely, it is absolutely true that 100% of the Gap can be broken down into identifiable units of cost. Those units can surely be grouped - or "bucketed" - for analysis purposes. This is the way Lean Thinkers try to approach any problem. If it's a cost problem, before we discuss solutions we ask: "What are the contributors of cost?")

The U.S. Versus the World Healthcare Cost Gap:

  1. Inappropriate care. Some would argue that this should be a sub-category of the medical malpractice problem (below), since many inappropriate procedures are driven by fear of lawsuit. No doubt this explains the reason for a number of inappropriate procedures, but not all. I suggest three primary reasons for the great amount of inappropriate procedures conducted in the U.S.A:
    1. Misuse of emergency facilities. (This is the favorite of the left-wingers. Don’t worry, you right-wingers get your turn below.)
    2. Defensive medicine. (This is the favorite rationale of the right-wingers.)
    3. Profit. (Surely some doctors sometimes prescribe and perform procedures that make a lot of money because they make a lot of money.)

    (By the way, Lean Enthusiasts – Which of the Seven Types of Waste is "inappropriateness?")

  2. Medical malpractice lawsuits, with all its associated costs.
  3. Large population of uninsured. (Their care does get paid for eventually, somehow by somebody, and surely not in the most optimum way.)
  4. U.S. consumers pay more for research & development of new medical technologies and pharmaceuticals. (Most new technologies come from the U.S., and Americans pay for a disproportionate share of its development, through higher prices for the products once they reach market.)
  5. A convoluted system of middle agents in the form of health management organizations and insurance companies. It only takes two to health care -- a provider and a patient. All the rest is muda, of either Type I or Type II (or, as Toyota calls it, Value-Creating Work and Non-Value Creating Work).

You know, it could be that the content of the extra 8% is just that the US has more of everything, in roughly equally amounts. Just general, overall excess. Could be. It could also be that the US population is just unhealthier. There's a sixth bucket: unhealthy population. So all we need is free access to a local gym and membership to Jenny Craig.

To switch gears just a bit, last week we had a great discussion about some of these issues on the University of Michigan campus. John Campbell, professor emeritus of political science and my long-time mentor on all things Japanese, joined journalist T.R. Reid, author of the current NY Times bestseller, The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care for a fascinating talk about national healthcare systems.

Prof. Campbell co-authored a book with Dr. Naoki Ikegami, Japan's top health system economist (and who appears in Reid's PBS documentary) which you must read if you are interested in a fascinating detailed look into healthcare in Japan, "The Art and Balance of Health Care Policy: Maintaining Japan's Low-cost, Egalitarian System" from Cambridge University Press (1998). Interestingly, the book was a best seller in Japan ten years ago yet went totally unnoticed elsewhere. I recommend it highly - it is still remarkably relevant to the national debate and efforts to reform U.S. healthcare financing and delivery systems. The highlights:

  • Japan pays half what the U.S. pays.
  • Japan has the highest life expectancy in the world.
  • Japan has the lowest infant mortality in the world.
  • Japan has universal coverage which is extraordinarily egalitarian.

Yes, as many will quickly point out, Japan's population is very different from that of the U.S.A. But, as T. R. Reid has found, the variance isn't just between the U.S. and Japan, it's between the U.S. and the rest of the entire developed world.

I am identifying the U.S.A. healthcare crisis as one of cost. I'm not sure of the solutions, or even the ultimate causes. I also know that, even aside from the cost problem, there is MUCH to be done - U.S. healthcare is a broken system on many levels and there is much lean work to be done to improve the situation. But, the U.S. national healthcare crisis is a crisis of cost. As percent of GNP, costs will pass 20% in no time at all. The cost versus revenue lines are converging, just as I saw them converging in the auto industry beginning many years ago. It will crash just as the financial system crashed last year. And THAT is the GAP that can be identified by comparing the U.S. national healthcare system to that of other countries.

Below, I attach some very interesting data for your reference. Rather than the familiar WHO statistics, this is from the OECD. The data seem to do a good job of showing apples compared to apples, healthcare dollar to health care yen or pound or Euro. (The real story to the data (besides the obvious which is seeing how ridiculous the U.S. looks overall) is the fact that the U.S.A. started from a high base (back in the 60s) AND has had a high growth rate. All the other countries EITHER started at a lower base rate OR started high like the U.S. but found ways to slow the growth. All the U.S. can hope to do now is seek ways to start to slow the growth.) You can see that clearly from the first chart, created by Mark Graban.

Note that ALL of the data below and the Cost Gap Analysis above represent only the first two sections of an A3. Not only do Lean Thinkers avoid jumping to a conclusion, for complex problems like this we don't even jump to five-why analysis of the root cause until AFTER we have broken the problem down so we can see it. In this case, the Gap is so clear in cost terms, that it begs a thorough A3 style analysis. I’ll stop at this point. I hope some of the lean healthcare specialists among you will pick it up from here!

Healthcare Spending as % of GDP

The following information is from the Organization for Economic Co-operation and Development (OECD) comparing the level and growth rate of health care spending in the United States with other OECD countries. The data I show here are a couple of years old – you can find up-to-date data yourself on the OECD website.

Total Health Expenditures Per Capita, US and Selected Countries, 1970, 1980, 1990, 2003

* Value shown is for 1971.

^ Break in series.

e OECD estimate.

NA: Not available.

Notes: Amounts in U.S. $ PPP. Germany is not included on this table because its data are not comparable over the time period due to reunification.

Source: Organisation for Economic Co-operation and Development. OECD Health Data 2006, from the OECD Internet subscription database updated October 10, 2006. Copyright OECD 2006, http://www.oecd.org/els/health-systems/health-data.htm.

Average Annual Growth Rates in Total Health Expenditures Per Capita, US and Selected Countries, 1980 to 2003; 1990 to 2003

^ Break in series: Austria, 1995; Belgium, 2003; Denmark, 2003; Finland, 1993; France, 2002; Ireland, 1990; Japan, 1995; Luxembourg, 2003; Netherlands, 1998; Norway, 1997; Sweden, 1993; Switzerland, 1995; United Kingdom, 1997, 2003.

e OECD estimates: Japan, 2003; Netherlands, 2003.

NA: Not available.

Notes: Growth rates reflect average annual change in health expenditures per capita, in national currency units adjusted to year 2000 GDP price levels. Germany is not included on this table because its data are not comparable over the time period due to reunification.

Source: Organisation for Economic Co-operation and Development. OECD Health Data 2006, from the OECD Internet subscription database updated October 10, 2006. Copyright OECD 2006, http://www.oecd.org/els/health-systems/health-data.htm.

Total Health Expenditure as a Share of GDP, US and Selected Countries 2003

^ Break in series.

e OECD estimate.

Source: Organisation for Economic Co-operation and Development. OECD Health Data 2006, from the OECD Internet subscription database updated October 10, 2006. Copyright OECD 2006, http://www.oecd.org/els/health-systems/health-data.htm

* Value shown is for 1971.

^ Break in series.

e OECD estimate.

NA: Not available.

Notes: Germany is not included on this table because its data are not comparable over the time period due to reunification.

Source: Organisation for Economic Co-operation and Development. OECD Health Data 2006, from the OECD Internet subscription database updated October 10, 2006. Copyright OECD 2006, http://www.oecd.org/els/health-systems/health-data.htm.

Percentage Point Change in Total Health Expenditures as a Share of GDP, US, and Selected Countries, 1980 to 2003; 1990 to 2003

^ Break in series: Belgium, 2003; Denmark, 2003; Ireland, 1990; Luxembourg, 2003; United Kingdom, 2003.

e OECD estimates: Japan, 2003; Netherlands, 2003.

NA: Not available.

Notes: Germany is not included on this table because its data are not comparable over the time period due to reunification.

Source: Organisation for Economic Co-operation and Development. OECD Health Data 2006, from the OECD Internet subscription database updated October 10, 2006. Copyright OECD 2006, http://www.oecd.org/els/health-systems/health-data.htm.

16 Comments | Post a Comment
Mark Welch November 18, 2009
Nice thorough analysis.

It would probably take a large panel of people to do this, but it would be very interesting to see an actual pareto of the contributors of the cost gap. Not necessarily to see if your suspicions are accurate, John, although that would be interesting, too, but to truly understand this "beast" so we as a country could understand them and then begin fixing them.
Eric November 19, 2009
Have you sent this to your congress man or woman. I think you should. This is very clear and understandable, as oppossed to the reality. A blame game, that is represenitve of our American business standard.

How hard would it be, or what would it take to present an A3 to the American people? This is just a small example of what is needed for all of us to understand our problem, and then to make an informed decision on the countermeasures we need to take.

Great way of using our current national problem as a learning opportunity!
Be Ware November 19, 2009
Great analysis, but I think there is one fundamental assumption you've made which also has a bearing on the debate:

Other countries provide the same level of heath care as the U.S.A.

On a basic level this is true, but as you point out part of the cost of our system is the myriad of advanced drugs/treatments that we pay for development of in the U.S.A.

If all the same treatments, techniques, and drugs were available in the comparison companies (able to be had in the same time period, etc.) it would be interesting to see if the gap would shrink.

Otherwise I agree with your analysis completely. Unfortunately in our day of partisan politics I hold little hope for anyone undertaking real gap analysis. Such factual analysis likely would take away the 'stick' Republicans need and the 'carrot' Democrats need to gain/maintain power.
John Shook's Lean Management Column November 23, 2009
From John:
Thanks, Mark. I agree it would be no trivial task to undertake, but given the attention the topic gets and deserves, surely such a panel could make some progress. My biggest aim with the column was precisely the hope to inspire someone to create the Pareto that you suggest. - john
John Shook's Lean Management Column November 23, 2009
Thanks, Eric. Not being much of a political animal, I had not considered sending this to my congressperson (let’s see, now, who is that…?), but maybe I’ll do exactly that. At any rate, yes, wouldn’t it be great to see an end to the blame game in favor of some rational debate of real issues. I haven’t been this frustrated by the tenor of a national “debate” since I was an idealistic college student. - john
John Shook's Lean Management Column November 23, 2009
Right, Be Ware, if we can find a way to compare each of these “buckets’ including development costs, we could see exactly where our extra costs come from. The development piece may be one of the most difficult to isolate, since as I understand it, most or at least many of those specific costs don’t even show up in typical breakdowns of national health care costs. Not directly, anyway. And, I agree that I don’t hold out much (any) hope to the politicians to take on the analysis in this way. But, there are many, many analysts employed by the US health care “system” (if you can call such a loose collection of practices a “system”) so surely some of them could take this on. Even a little light can shine brightly when all around is dark. - john
bobo November 23, 2009
I believe you have hit on the most vexing problem I have been thinking about for some months. Why does a less than equivalent level and quality of care in the US cost approximately twice that of comparable economies?
The thing that I keep coming back to in my thinking is that this very innefficiency is also the source of a lot of money (incomes) to alot of people. If we trimmed out the unnecessary work(Waste)these people would likely be forced to come up with something more productive to do.
I have read that there is upto 60% waste in our $2.4trillion healthcare system. That represents alot of pay checks for some and we (and our politicians) have little incentive to put these individuals and their families out of work.
I like the concept though, that by inproving our operational methods to remove waste we can effectively cover the 54-56 million of uninsured at no addtional cost.
It is also stated that 10% of every healthcare dollar is spent on all capital expenditure. I am a healthcare architect and feel that if through design we could save 10%of the operational costs, we can neutralize the cost of all healthcare facility replacement.

I think we also have to look at the so called profit motive in the US Healthcare system. If as your not other national systems cost only 8-10% perhaps the 5% difference is profit. I have also read that single payer systems spend <10% on administrative costs compared to 25-30% for private health insurance.That is a margin of 15-20% profit/waste combination.
Colin Baird November 23, 2009
This is a great analysis of the current situation. I would be will to work with anyone who is interested in digging into the detail and providing a complete and thorough examination of every aspect that intersects with our current healthcare system.

Those who do not have healthcare deserve our time, attention and dedication to highlight the biggest problem facing our nation since its inception.

In solidarity
Colin Baird
John Ford November 24, 2009
While I don't dispute the findings, I would point out that the data does not appear to have been normalized for changes in population and GDP over the period studied. One example is the apparent 1.1% reduction in HC costs in Ireland as a percentage of GDP between 1980 and 2003; certainly this data point reflects growth in GDP rather than a real reduction in cost.

Someone else noted that this evaluation assumes equal quality of care in all these countries. It's anecdotal, however I know of many examples of people coming from other countries to be treated in the U.S., but have almost never heard of Americans traveling elsewhere for treatment.

Overall, I agree that costs need to be addressed, however comprimising the quality and access to care that Americans now enjoy would be jepordized by wholesale adoption of the systems in many of the countries used in this comparison.
DL November 24, 2009
A gap analysis would be the first major effort to understand the rapid rates of cost increase, usage increase and % of GDP increase which are the current reality of the US healthcare system. Certainly a much better use of the $600 million dollars recently spent by lobbyists to engage with Congress regarding reform - let's first understand where the surest opportunities for reform exist, a novel idea!
I would add (and am suprised that since TR Reid's book was referenced this was not included) that there exists another bucket of "cost" in the US healthcare system which does not exist in almost any other country mentioned - PROFIT. Profit of healthcare facilities, profit of insurance companies, and to a large degree "profit" by individual providers (physicians). In no other country are physicians paid what US physicians are paid, even once malpractice insurance costs are considered, and in no other country are insurers allowed to make a profit on basic healthcare coverage. This profit surely adds to the bottom line of US healthcare costs. Swtizerland is the most recent country to comabt this issue of profit, perhaps a starting place for the US...
Anonymous November 25, 2009
You may have missed another source of variation that could go under inappropriate care or not and that is consumer preference. In a market where consumers are largely free to choose and are provided with an unlimited supply of health services with generally low relative incremental incurred cost it seems that Americans choose to consume medical care at a much higher rate.
MichaelB November 25, 2009
Great insights and information as usual. I would add one other bucket to your cost categories and that is the amount of expenditures for healthcare in the last two years of life. I have seen statistics that state this is 50% to 80% of a person's lifetime healthcare expenditure. I have also seen studies that refute this, so it would be interesting to learn the truth.

I have not seen studies on how US healthcare compares to other countries for the last two years of life. But it does seem more difficult to get some treatments when you are an older patient elsewhere around the globe. Merely my observation, not substantiated with data.

I would also do an 80/20 analysis on the expenditures. Do 20% of the patients or diseases or ?? account for 80% of the expenditures? If Pareto holds true, that would also provide some focus for reducing costs.

Your point about the focus in Washington needs to shift is very important.

Best wishes to all for the Thanksgiving Holiday (US) and to everyone for the new year.
Michael Bremer
Anonymous November 30, 2009
For a Lean forum I am amazed that cost and not time is the Gap that is analyzed. My quick internet search shows numerous stories about Great Britain’s, Canada’s and New Zealand’s “6 months or more wait” for a colonoscopy vs. America’s “days to weeks” wait and the impact of those delays. Do you think Dr. Bahri would have had the same results if he had focused on cost instead of Lead Time and Production per Visit? What if Toyota’s focus had been to close the cost gap with GM? I thought in Lean we were supposed to be focused on the customer, what are they willing to pay for not what are we willing to spend. (sorry I don't have time to set up a google account right now, 'have to go to the GEMBA')
Anonymous December 2, 2009
I really don't see how this comparison is useful. Perhaps the cost is higher because we simply consume more healthcare than the other counties. If a better measure were used (cost/patient, cost/hour of service, etc...) the US system might be better. Are the other countries providing better value or simple providing less healthcare.

Of curse there is waste in the US medical system what industry doesn’t have waste?

I too expected better comments from what I considered to be one of the premier Lean communities.

George December 10, 2009
Well, the data is interesting and I believe publicly available. I also understand both sides, although I tend to agree with the one that suggests more analysis before making definite statements. The way the data is presented, although I believe in its accuracy, it is meant to create a one sided picture. Based on it, it is easier to see the "gap" in cost then understand deeper whether there is an underlying reason.

I would also be very cautious looking up to other countries that have different models. It would be interesting to see a survey of US citizens with one simple question: Which one is better: the USA or Canadian healthcare systems? Much is being discussed around the two models. And I believe that, if you do the survey in USA they would immediately call the Canadian one, not necessarily that they believe is better - nor that they really understand the difference - but rather to penalize what is daily in the media as a terrible, unworkable, bad, etc. etc. system. Much the same as many Canadians look to the US one as, at a minimum, an alternative to the 6 months waiting that someone else mentioned above.

I believe the solution is in neither one, although I hear people on this side - I am Canadian - saying how good the US system is as I hear US people hoping to live in Canada! I live right across the border, in Windsor, Ontario -; it is not even funny to see doctors moving to US - where they are paid more - and US patients crossing to Canada to buy cheaper drugs and go to what we call "walk-in" clinics. I keep asking - myself mostly... - why I am not allowed to pay additional money to have a better health? Why someone can buy an expensive car, house, smoke, drink... etc. and I can't invest my money in my health? Why many Canadians living close to the border prefer to pay US hospitals for many medical procedures instead of waiting months - or years... (I am being bad here...:)) to have it done in Canada? The answer is simple: sometimes, months, weeks or even days and hours make a difference. And sometimes, that is a huge difference. It actually goes back to Shakespeare's "To be or not to be" or "To live or not to live".

I would, in no time, drive 10 miles to the closest US hospital, pay whatever is needed for giving to anyone in my family a better chance to be cured. As a matter of fact, believe it or not, there are people that are willing to fly 2,000 miles or more to US for the same reason.

I guess all I am saying is to be cautious blaming a system before we actually have a real better solution to replace it. Personally, I would trade at any point in time the "free" healthcare system I live in for the "most expensive" one 10 miles from my house. And, I am not a rich one; I just want to have the freedom to invest in my health.

Happy Holidays to all of you!


5s Lean December 13, 2009
Great article. This article info is very interesting and helpful.
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