Accounting for the Cost of US Healthcare

I read Steven Brill’s healthcare piece recently and wanted to get a better high-level view of where dollars in the healthcare system are spent. I find aggregate data more informative than anecdotes about hospital bill line items (not that I didn’t like the story), so I was happy to come across this report from MGI. It has a ton of  helpful graphs including the first one below that roughly estimates the size of various segments of the healthcare market. It shows the total size of various segments in 2006 as well as a breakdown of ESAW (their rough estimate of “Estimated Spending Accounting for [country] Wealth”).  Here’s what I took away from some of their graphs:

• Outpatient care made up almost half of healthcare spending. Also, in the report they point out that outpatient care is also growing faster than the other segments.
• If you look at the second graph, you can see one reason why outpatient care is growing – the margins are substantially larger (estimated to be ~35% for outpatient versus 2% for inpatient).
• Finally, for the third graph, you can see that the biggest component of spending within outpatient is physician visits, for which MGI says the increase mostly reflects price increases (and some mix shift to more expensive items) rather than volume increases. Of the 8% inpatient grew annually, they attribute only a quarter of that to volume growth. So the idea that price increases are driving a nontrivial part of some of the biggest components of healthcare spending rings true based on some data and evidence from this report.
• Why might we see price increases in various segments? There are many reasons, but Baumol’s cost disease is probably one of them.