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SALMAN KHAN: I'm here with Doctor Laurence Baker from Stanford Medical School, and we're going to talk about health care costs, or health care economics, which you're an expert in. LAURENCE BAKER: I like to spend a lot of time thinking about-- [INTERPOSING VOICES] SALMAN KHAN: So all of these charts, which all seem to have a similar shape here, these are, essentially, measures of how much we're spending on health care. So this first one right here, what's this? Total health spending 1960-2009. And it says, United States. LAURENCE BAKER: This is the United States. This is data that's compiled by the federal government every year since, well, 1960 and this figure is-- SALMAN KHAN: And this isn't adjusted for inflation. LAURENCE BAKER: That's not adjusted for anything. That's the total dollar value that the folks in the federal government who like to calculate this number have come up with for the amount we spend on health care in a year. SALMAN KHAN: OK. So someone looking just at this data point might say, OK. Maybe it's not inflation-adjusted. Maybe the inflation curve is also growing at some rate here. But the absolute numbers do seem to be large. By 2009, I guess it's already-- well, 2009. We're already several years passed that. two and a half trillion dollars just to get people clear to what we're talking about. This is in billions. This is 2,486 billion. So that's $2.4 trillion, and then that's predicted to almost double by 2019. And our GDP is on the order of $15 trillion. So it's a significant chunk of everything that we produce. LAURENCE BAKER: That's a big chunk of everything we produce. Yeah, going up rapidly. Hard to predict a little bit, but all the trends are up and so we're worried about-- SALMAN KHAN: And this is on a per capita basis. So I guess there's two ways to think about why costs are going up. One is that maybe we just have a lot more people or, that on a per person basis, we are spending more. And this chart seems to imply the latter. LAURENCE BAKER: This says, on a per person basis, we're spending more. Still not inflation adjusted in this chart. But going from $100 or so in 1960 to $8,000 in the last couple of years-- and you can see the trend since, say, 2005 in there. It's up and it's up pretty steeply just in the last little bit. And headed for maybe $13,000 or $14,000. SALMAN KHAN: $13,000 or $14,000. That's a nice sub-compact car one could buy. Not to say what's more important. And so this next chart right over here is actually that calculation as a percentage of GDP. And, to me, this is, maybe, one of the most relevant things, because that adjusted for things. It doesn't directly adjust for inflation but it says, as a percentage of all of the goods and services as an economy that we are doing, this is a percentage. So this is an interesting one right here. So in 1960, roughly 5% of everything that all the goods and services Americans produced, 1 in 20 of that, of our energies, was spent towards health care. And now it's looking like, in the next few years, it's going to be approaching 20%. It's already in the upper teens. LAURENCE BAKER: Yeah, its past 15%, 16%, and we're headed up. The last year or so, maybe, it was a little slower growth, but you can see the trend over the last decade or two decades. It's up up and up. So you're right. When health economists, when people who think about this more deeply, want to think about health care spending two and a half trillion is an interesting number. 8,000 is an interesting number. But this one captures population growth to a large extent, captures inflation. And the fact that we're spending one seventh, roughly, of our productive capacity on health care is interesting-- SALMAN KHAN: And closely approaching-- actually, it's already one sixth and approaching one fifth of everything that we do is about health care. And I guess there's a couple of things there. Maybe we're getting healthier, I guess, is one possibility. Or maybe we aren't and then something is weird. LAURENCE BAKER: Well, that's the really interesting question. We can think about why this is going up, but at the end of the day, you're happy if we're spending this much and if we're spending more than other countries, we're spending more than we did last year, if we're getting healthier because of it or if we're getting happier. Interesting question if we want to count happiness. It doesn't make us healthy, but if we're getting something we value, and we're getting worried, and we get worried-- SALMAN KHAN: There are many forms of happiness that do not make you healthy. [LAUGHTER] LAURENCE BAKER: At the end of the day, this may be our biggest question. SALMAN KHAN: Some will act directly against your health. And that goes straight into this chart which you're talking about. Maybe we should or maybe we shouldn't compare ourselves to other countries. And this is comparing ourselves to other countries. So this chart right over here. This is the blue graph. So we are this light blue [INAUDIBLE] same. So this is us. This is the United States right over here. That is us, the United States. And if we compare to other developed countries with, I guess, not too different demographics-- LAURENCE BAKER: Yeah, the overall developed countries, industrialized countries, countries where the standard of living is in pretty good shape. SALMAN KHAN: They have a broad-- it's not a homogeneous-- LAURENCE BAKER: Not entirely homogeneous. Some people will argue the US is more diverse than-- SALMAN KHAN: The United Kingdom is quite-- LAURENCE BAKER: --pretty diverse countries, generally. Certainly countries with immigration issues that the US has, countries with lower income and higher income populations that the US does. So they're pretty diverse. SALMAN KHAN: Right, I mean, when you look at this, maybe this is the real chart to look at, because this is the percentage of GDP but also puts it in context of other countries. And that's where they're all kind of bundled around in this, I don't know, the low end. What is this, actually, the UK-- I didn't realize-- is actually at the low end as a percentage of GDP. And France is at the high end of GDP. LAURENCE BAKER: Yeah, so I've done a little picking and choosing of the European countries. Yeah, there are some that are a little higher, but nobody comes close to the US. These are the big ones. UK is the lowest in the world, really, of the developed countries, the European countries. And France, Germany, Canada, are commonly compared to the US at 10% or 11%. So we're 50% higher, 60% higher than those double what's going on in the UK. SALMAN KHAN: And do we know why we're doing this? Where is that going? Where are we spending money that these other countries aren't? LAURENCE BAKER: Right, so two places. Ultimately, the economics of it would say, if you're spending more than somebody else, how much stuff you buying, what kind of things you're buying, and then the price that you're paying per thing. So we're talking either about prices or quantities. So it's a little bit of both. If you compare us across countries, we buy more of some kinds of services than other countries buy. There's some interesting comparisons-- SALMAN KHAN: So we might get more MRI's per person or something like that. LAURENCE BAKER: We certainly do get more MRI's per person. It's interesting. It's not that we have more doctors per capita, say, or more hospital beds per capita. It's not that we get more primary care visits in the US. It's actually true that, in many European countries, you get more primary care visits, more time with your primary care doctor then we get in the US. But if you were picking a poster child, it might be the MRI or something more sophisticated, something more expensive, specialists visits, lots of tests, and things like that, that we buy in the United States that they don't buy in Europe. And that drives up our health care costs. SALMAN KHAN: So we definitely are buying more and it's costing us more for-- LAURENCE BAKER: And the price is also different in the United States. There's some people who have done studies of this. There's always little bits of debate about how you define these prices exactly, but we pay doctors-- if you're finding doctors' annual incomes, they're going to be higher in the United States. That is to say, we're paying, in some sense, a higher price for a year of work from a doctor than they pay in Europe. We're paying a higher price for our hospital administration, for our staff in the hospitals, things we tend to pay more. So we buy more things. We tend to buy more of the more expensive things. And we tend to pay a higher price. SALMAN KHAN: Do you know, roughly, how much of the health care dollar goes towards salaries versus drugs versus things like MRI's and the kind of fixed costs like MRI's and hospital beds and things like that? LAURENCE BAKER: Yeah, so some of this you can figure out. We could almost put another slide up on there on the screen there. The US health accounts will tell you something like doctors and hospitals and drugs-- drugs, 10% or 15%, a little less than that. I would have to go back and look at the data on physicians. But physicians-- let's say that hospitals and physicians are 20% or 30%-- I hesitate to give you look the number. SALMAN KHAN: It's not 90% LAURENCE BAKER: It's not 90%. SALMAN KHAN: When we say hospitals-- so that includes outpatient and inpatient? LAURENCE BAKER: Yeah, so there's lots of ways these health accounts get broken up, physicians, hospitals, emergency departments, different kinds of equipment and things that get purchased, there's research and there's buildings, and all that-- SALMAN KHAN: So just [INAUDIBLE] none of these things do make up the bulk of it. We had a video about drug pricing, but drug pricing by itself is not the reason why we're out here. And physician pay by itself is not the reason why we're out there. All of these are contributing. All of these we're getting more of and we're paying for. LAURENCE BAKER: It's a mix. At the end of the day, it's going to be a bunch of things like this all thrown together. We buy more stuff. We tend to buy more expensive stuff. We buy it from people who we pay a lot. We buy more specialist visits. For example, in the US, we pay specialists a higher annual salary than we pay generalists, and that comes out in the prices. SALMAN KHAN: They don't do that in Europe? LAURENCE BAKER: Europe does pay more, but everybody is shifted down. All the physicians are shifted down. And I think the specialists are probably shifted down more in Europe than the generalists are. We pay more for our prescription drugs here. We pay more for-- SALMAN KHAN: Now, what are we getting in terms-- other than more Mercedes in the doctors' parking lots. I'm kidding. I'm kidding. Although, you do see a lot of those. It seems to be the car of choice when I visit the doctor. And my wife's a physician. Obviously we all work with many, so, they've worked very hard so, I'm not going to make any statement about they're underpaid or overpaid, especially relative to some people I knew in the finance world, I would say that they're definitely underpaid. LAURENCE BAKER: Possibly, yes. SALMAN KHAN: Yes. They're above Mercedes in that world. And so are we getting anything in exchange for this? Are we getting less wait times? Are we getting better access to our doctors? What are we getting or what do we know about that? LAURENCE BAKER: Well, so this is the debate. This is in, maybe, a microcosm one of the big debates we're having in the US right now. We're spending more every year. We're spending more than other countries. If it was clear we were twice as well off, twice as happy-- SALMAN KHAN: And we're growing faster. LAURENCE BAKER: And we're growing-- yes, it depends on how you look at the timing, but we're growing a little faster in some years. Our health care costs go up 10%. If we knew we were 10% happier this year with our health care system, we would be happy. And that's the big debate. There are some cases where the US-- there are things you can point to. We have fewer waiting lines for some services, and some of the countries that keep the costs down have more lines. It's also not the case that they have waiting lines for everything and the really serious stuff doesn't tend to have long waiting lines. We get easier access to some of the high tech stuff, which we like it, and so that drives up our spending but maybe makes us happy. SALMAN KHAN: It may or may not lead to better outcomes. So it makes us happy that we feel like we're getting better customer service. Instead of waiting three months for a procedure, we're getting it in three weeks, which would make me happier. I mean, objectively, I would be much happier about that. But what happens when we look at the overall outcomes? Life expectancy, and people dying from heart disease, or whatever? LAURENCE BAKER: This is kind of a mixed bag. Some of the most commonly cited figures are cases where the US doesn't do as well as some European countries. We spend a lot more and we don't do better on life expectancy. We don't do better an infant mortality. There are some cases where the US does really well, especially things where access to the high end stuff can make a difference. And so there are some situations where it looks like we buy the kinds of things that are really going to make us healthier. But it's not across the board. And some of the really interesting ones are cases where there's fairly inexpensive stuff that looks like it would work well and improve outcomes, and sometimes we're not doing the inexpensive stuff that other countries are doing. And it's coming out to maybe hurt us. We wouldn't be having the debate if we were clearly better off, but it's really the case that, in only some of the measures, do we end up better off. We don't always vaccinate our kids more. We don't always get people screened more for cancers and things like that. But sometimes we do. So there are success stories here. SALMAN KHAN: Now, one thing that's interesting about looking at this chart a little bit deeper is that it doesn't look like this is something that, you know, since the American Revolution that we've been spending double as a percentage of GDP relative to everyone else. I mean if I just look at this chart right here, it seems like us and Canada, we were right along very similar to each other to about the early '70s. And then we're still in kind of that pack with Germany and France. I guess, relative to the UK, we actually always have been higher. But then right around this time period, the late '70s, early '80s-- that's where we really started to break off. Was there some policy shift there? LAURENCE BAKER: So there's not a tangible, specific policy shift. What starts happening in the US there is we start adopting and we start shifting toward the higher-end stuff more. And some of that's the part-- SALMAN KHAN: That's where the technology started to really get-- LAURENCE BAKER: I think that's mainly the story. We started to really-- the research in things, the development that went on in the world, really from 1940, '50, '60, started to produce the capacity to do new and expensive things. And the US grabbed those and other countries in the world were less quick to grab them, maybe, you would say more careful. Maybe you would say too careful, too slow. But the US, as you see there, really quickly started to put up specialized hospitals, started to buy the fancy equipment, and you can see what kind of came out of it. SALMAN KHAN: And to some degree, probably, the whole world benefited from that because you're going back to the drug pricing or the MRI manufacturers were able to get those returns and, hopefully, much of that they're able to reinvest and not spend too much on other things. But it is fueling-- LAURENCE BAKER: Yeah, the innovation-- there's always these kinds of questions that swirl around here. If the US pays a lot of money and that comes back into innovation then everybody benefits from, including us, maybe it's OK. I think there are people who debate whether we got enough innovation, enough benefits that's tangibly related to our spending to make our spending worth it, but there are some cases where that probably happened. And so there's some subtlety to the question. I always say, if you're the Yankees and you're going to pay the huge amount for the big payroll and the big stars, people expect you to win every time. And that's the US's challenge. If we're going to pay the big bucks-- SALMAN KHAN: We should show results. LAURENCE BAKER: --we really like we want to show results every time. And sometimes we do get the results, but it's not often enough. SALMAN KHAN: It's not ambiguous. We're not winning the championship every year. Very interesting.