Healthcare accounts for a large and rapidly growing portion of the developed world's gross domestic product. As a result, governments and healthcare organizations are increasingly interested in ways to rethink and reform their healthcare systems (Exhibit 1). Yet we are early in the process and many fundamental questions remain. What is at the root of the differences in spending among countries, and why do the differences appear to be unrelated to variations in overall life expectancy?

To help provide a foundation for future reform, we examined and compared the healthcare systems in the US, Germany, and the UK by assessing productivity in the treatment of four diseases during the late 1980s: diabetes, cholelithiasis (gallstones), breast cancer, and lung cancer. We looked at the day-to-day actions of doctors and hospitals and tried to connect these actions to differences in longevity and quality of life. Surprisingly, differences in actions mainly arose from variations in how doctors and hospitals were paid and the constraints they faced in providing treatment.

Each country's health system had a distinctive structure, level of spending, and level of productivity, all stemming from different kinds of regulation. In particular, we found that degrees of competition and care integration were important in explaining productivity. Recent changes in the UK and US systems—which have increased competition and integration—are likely to be more helpful than changes made to date in the healthcare system in Germany.

Our principal findings were (Exhibit 2):

• That the US spends the most per capita on healthcare, followed by Germany, then the UK. Higher spending in the US was largely due to higher compensation for doctors and other personnel and higher administrative costs (Exhibit 3).
• That the US's higher spending was not due to low productivity; in fact, it was more productive than Germany in all cases and than the UK in the treatment of lung cancer and gallstones. It performed about the same as the UK in breast cancer and trailed the UK only in diabetes treatment (Exhibit 4).

In particular, we found that the US led in lung cancer and gallstones treatment because it adopted productive technologies more quickly and broadly and kept patients in the hospital for shorter periods; that Germany was less productive because it used less outpatient care and kept patients in the hospital longer; and that the UK led the US in diabetes care because it focused resources on the patients who could benefit most and integrated the care of multiple specialists better over a patient's lifetime.

Wide variations in treatment and productivity

Assessing productivity in healthcare is more difficult than assessing it in other sectors because treating patients is a far more complex process than producing many other goods and services.¹ It involves numerous inputs, including the patients' own behavior. And the output of the treatment process—improved health—is very hard to quantify.

It is possible to cut through the complexities and reach some conclusions, however. The conventional wisdom that the US wastes healthcare resources, for instance, is challenged by our finding that its productivity was higher than Germany's in all cases and higher than the UK's in some. While there was room for improvement in the treatment of at least one disease (diabetes), the reasons for the US's higher aggregate spending were its high compensation for doctors and other personnel and higher administrative costs (Exhibit 5). Assessing the underlying causes of these was outside the scope of this research effort.

Again contrary to popular perception, the large cross-country differences in productivity for each disease stemmed from variations in how doctors and hospitals treated patients. Despite similar clinical training and access to similar medical expertise and technology, there were surprisingly big differences in the selection of patients for treatment, in how long it took to treat a disease, in when and how broadly technologies were adopted, and in where treatment was given (Exhibit 6, top two sections).

In gallstone treatment, the UK's slower adoption of laparoscopic technology led to lower productivity ...

For example, more selective delivery of care and slower adoption of technology in the UK led to 23 percent fewer resources consumed than in the US, but mixed productivity relative to the US. The UK's lower productivity in gallstones resulted from later adoption of highly productive laparoscopic surgery (a video-guided technique which requires only a small incision). Its lower productivity in lung cancer resulted from a more restricted patient selection process and less use of computerized tomography (CT) scans in diagnosis and staging of cancer progression. In diabetes, however, the UK's superior care integration led to lower complication rates and greater productivity, resulting in less resource use through aggressive management and team-based care in specialized clinics. Finally, in breast cancer, the UK's lack of the broad-based mammographic screening program used in the US appears to have increased productivity in some aspects of treatment.

Germany's greater use of inpatient care led to 39 percent more resource use on average and lower productivity relative to the US. In all three disease comparisons, Germany favored inpatient treatment over less resource-intensive outpatient treatment and had significantly longer hospital stays. In gallstone treatment, German patients also took longer to recover and return to work, even though the adoption rate for laparoscopic technology was similar to that of the US. This relatively consistent pattern suggests that underlying healthcare system characteristics influence provider behavior and approaches to treatment.

In all three countries, doctors and hospitals responded predictably and consistently to their economic incentives and constraints within the boundaries of acceptable medical practice. Incentives and constraints were, in turn, determined by the structure of the healthcare system and the way in which the most important markets—those for health insurance coverage and hospital and physician services—were regulated. The three countries had arrived at very different structures by the late 1980s, particularly in terms of the degree of care integration and competition. Differences in these two dimensions led to different incentives and constraints and therefore to varying productivity by disease. No country was the most productive across all diseases.

Country-to-country comparisons

UK versus US. The UK's more selective delivery of care and slower adoption of technology arose mainly from its economic incentives for doctors and constraints on the supply of physicians, hospitals, and capital. These, in turn, were a product of the UK healthcare system's fixed physician salaries—which contrast with the predominantly fee-for-service (FFS) payments in the US—its less intense competition between physicians for patients and payor contracts, and stronger regulation (Exhibit 6).

The UK trailed in treating gallstones because competition and FFS incentives in the US led to faster and broader adoption of laparoscopic technology; US physicians had financial reasons to respond more to consumer demand and insurance companies readily accepted the more cost-effective surgical substitute. In lung cancer care, the UK's restrictions on referrals and its cap on capital investments led to a more intense triaging process with far less use of CT scans for diagnosis and staging; this led to a less optimal group of patients selected for surgery, with worse outcomes and lower productivity. In breast cancer treatment, the combination of competition and FFS incentives in the US led to mixed productivity because it encouraged a broad-based screening program, but also encouraged more mastectomy versus the less resource-intensive lumpectomy procedure, shorter hospital stays, and greater use of the outpatient care setting.

... In diabetes, however, the UK's more integrated care approach and less intense competition led to higher productivity

In diabetes, however, the UK's more integrated care approach and less intense competition led to higher productivity. The National Health Service (NHS), which provides lifetime health coverage for the entire population, identified diabetes as a priority, provided dedicated funding, and actively encouraged healthcare providers to organize in specialized clinics offering aggressive preventive care and disease management. In addition, the limited number of general practitioners and the heavy demands on their time forced them to be better at selecting diabetics for treatment, referring the most severe cases to the diabetic clinics and encouraging the less severe to follow self-treatment regimens. This led to lower complication rates overall, more economical use of resources, and better outcomes.

The US system discouraged such an integrated approach. High turnover among US insurers' members—up to 40 percent a year—and insurers' fear of attracting too many diabetics if they offered integrated treatment, coupled with FFS incentives for doctors, led to more fragmented care and some unwillingness to invest in specialized or preventive care.

Germany versus US. Germany's greater use of inpatient services and longer treatment lengths can be linked to three factors: incentives for hospitals and some specialists to fill hospital beds, regulations on hospital supply that actually led to surplus capacity, and regulation that discouraged the substitution of outpatient care for inpatient care (Exhibit 6).

Specifically, German physicians and hospitals were, by law, compensated by their sickness funds (the equivalent of US insurers) on a per day basis. In the US, however, hospital services were compensated on a per case basis through Medicare (a set payment for the entire hospital episode), and in a variety of ways through private insurers—including FFS, day rates, and case rates. And while German and US hospitals alike competed aggressively for patients, only US hospitals faced any competition in their negotiations with insurers; by law, each German hospital negotiated day rates with all sickness funds en bloc.

German hospital department chiefs actually had incentives to increase their hospitals' workload

US private insurers also faced price-based competition for members and therefore had an incentive to manage hospital costs and lengths of stay, whereas German sickness funds were essentially precluded from competing on price and from bundling hospital care in different ways. German hospitals also faced the threat of regulatory review and capacity cuts if occupancy fell below 85 percent. Furthermore, hospital department chiefs actually had incentives to increase their hospitals' workload: they personally could earn FFS income from private patients to supplement their hospital salaries, and their departments were allowed bed capacity for private patients in a more or less fixed ratio to their utilized public beds.

Ironically, Germany's attempts to regulate hospital capacity helped create a surplus. As the regulators, state governments had incentives to increase the number of local hospital beds, because they could create jobs and receive federal transfers from payor funds into their state economies. In addition, the regulatory barrier between inpatient and outpatient care—with each having separate providers and specified services, payment, governance, and oversight—precluded shifting inpatient care to more cost-effective outpatient settings as well as coordinating treatment across these care settings.

Recent changes and implications

Combining our productivity findings with aggregate analyses suggests several implications for policymakers and healthcare organizations interested in reform. The critical first step is to identify the problem or opportunity in precise terms: Is productivity low? Are compensation, other medical prices, or administrative costs too high?

Since the late 1980s, each country's healthcare system has changed a lot, moving toward greater competition and integration of care (Exhibit 7). While the impact on productivity, input prices, and administrative costs has yet to be determined, our findings allow us to assess the extent to which the recent changes are likely to improve productivity.

US developments have led to more integrated care in some diseases and price reductions for health coverage in some markets

In the US, intensifying employer demands and competitive health coverage and care provision markets have led to more integrated care in at least some diseases through the emergence of health maintenance, preferred provider, and other managed care organizations. This has happened without significant regulatory changes. In addition, insurers and healthcare providers have created disease "carve-out" products that integrate care more effectively in areas such as cancer and diabetes. Not surprisingly, these developments have led to a decline in specialist physician compensation and to actual price reductions for health coverage in some markets. The effects on administrative costs are unclear.

In the UK, the 1991 reforms introduced some competition at the local level between payors and providers and fostered somewhat more integrated care, but left the integrated lifetime coverage and monopoly power of the NHS intact. Many NHS-owned hospitals were also privatized as self-governing trusts with greater control over their capital purchases. The overall budget constraint remained, however.

While the system changes have actually increased administrative costs, their effect on productivity is still unclear. According to some estimates, as many as 50,000 nursing jobs and 60,000 hospital beds have been eliminated since 1990, but 20,000 senior managers have been added in the NHS. There is some evidence that the pace of technology adoption has quickened: a targeted breast cancer screening program based on mammography has been established, while the penetration of laparoscopic technology now approaches US levels. Although some hospitals and their specialists still face supply and capital constraints and system competition has been limited to date, we would expect some improvement in UK productivity, at least in the diseases studied.

In Germany, important reforms have been made in the health coverage and, to a lesser extent, in the care provision markets. As of 1996, sickness funds are allowed to compete for members on the basis of price and other factors, but restrictions on their ability to negotiate price differentially with individual providers or to bundle care in different ways (by disease or case, for example) remain intact. While regulated case rate payments for hospitals have been introduced, they cover only 15 to 20 percent of cases. Regulatory barriers between inpatient and outpatient care remain, as do the regulatory processes for controlling hospital and physician supply.

It is unlikely that recent changes in the German system will do much to improve productivity, unless they somehow lead to removal of the regulatory barrier between inpatient and outpatient substitution, greater flexibility in sickness funds' negotiations with providers, or the adoption of case-rate hospital payments across the board.

The US and the UK are moving towards productive change in their healthcare systems, with each adopting some of the other's beneficial characteristics

Thus, the US and the UK appear to be moving in the direction of productive change in their healthcare systems, with each adopting some of the other's beneficial characteristics. But given the questionable impact of German reforms to date, it is likely that the productivity gap between Germany and the US—and possibly between Germany and the UK—is widening.