Health Care Spending in the US vs UK: The Roles of Medical Education Costs, Malpractice Risk and Defensive Medicine

We analyze the extent to which three important factors can explain the high costs of health care in the US relative to the UK: (i) the high cost of medical education, (ii) high risks/costs associated with malpractice litigation, and (iii) excessive diagnostic testing arising from the practice of defensive medicine. To do this we formulate, calibrate and simulate a model of the demand and supply of physicians, the labor supply and treatment decisions of practicing physicians, and the market for malpractice insurance. Consistent with prior work, we find that direct costs arising from malpractice risk and malpractice insurance can explain little of the cost differential between the two countries. However, we find that the much higher cost of medical education in the US interacts with malpractice risk in an interesting way: It leads doctors to optimally choose to engage in a high level of diagnostic testing in order to mitigate risk (where by ”optimal” we mean from a private rather than social perspective). This defensive behavior leads to an increase in costs far beyond what can be accounted for by malpractice insurance costs alone. Our simulation results imply that more generous medical education subsidies (like those in the UK) would lead to both improved patient welfare and reduced overall health care costs in the US system (a Pareto improvement).