The Productivity of Health Care and Pharmaceuticals: An International Comparison. - Review - book review

Business Economics, Jan, 2000 by Merrill Matthews

By H.E. Frech, III and Richard D. Miller, Jr., Washington DC: The AEI Press, 1999, 108 pp., $14.95 paper.

The title of this book, The Productivity of Health Care and Pharmaceuticals: An International Comparison," may be a little misleading. A better one might be, The Difficulties in Comparing International Health Care Statistics, Especially with Regard to Pharmaceuticals. The current title conveys the goal, but the book is mostly about the quest.

The goal of the authors, H.E. Frech III, a professor of economics at the University of California, Santa Barbara, and Richard D. Miller Jr., a research analyst with the Center for Naval Analyses, was "to study the production of health with emphasis on the productivity of pharmaceutical consumption and other health care." In other words, they wanted to assess pharmaceuticals and other components of health care across international lines.

The authors begin their task with an extensive review of the available literature. Since international comparisons in health care face a number of difficulties--such as exchange rates, different methods of measuring health, cultural differences, etc.--there is always room to improve on older studies. Explaining how the authors tried to avoid the pitfalls takes up much of the book. As a result, one of the best uses of the book may be as a guide for others who are also trying to do international comparisons in health care issues.

Frech and Miller point out that the first major problem is converting "a nation's per capita pharmaceutical expenditures to U.S. dollars for the purpose of cross-national comparisons." You can use purchasing power parity (PPP) based on countries' gross domestic products, but the authors contend that conversions using GDP PPP exchange rates "invariably underestimate actual pharmaceutical expenditures outside the United States." A better measure is the pharmaceutical PPP exchange rate. For example, a GDP PPP exchange rate (for the year 1985) shows that for every $150.00 spent in the U.S., the French spent $176.36. A pharmaceutical PPP exchange rate yields $401.38 in spending for the French per $150.00 in the U.S. (Pharmaceutical PPP exchange rates also more closely approximate comparisons made by economists Patricia M. Danzon and Allison Percy (1995) and a much earlier study (1986) by economist Tadeusz J. Szuba.)

Thus the authors settle on pharmaceutical PPP exchange rates for 21 OECD countries, conceding that they, "however imperfect, are the best conversion factors available" and that "our measure of pharmaceutical consumption should still be viewed as only a reliable approximation."

As a comparison of all the countries demonstrates, "France seems to outspend the other countries significantly, with Italy and Germany at the next tier, with expenditures significantly higher than those in the United States. Switzerland and the United Kingdom tend to consume fewer pharmaceuticals than the United States no matter which measure is used."

Even though the authors stress the role pharmaceuticals play in the health of a nation, that is only part of their aim: "Our primary interest is the determinants of the health of a nation's citizens." The method they use is familiar to business economists. They estimate an econometric production function. Here, they look at such standard health indicators as life expectancy and infant mortality as outputs. The inputs are per capita real expenditures on pharmaceuticals, nonpharmaceutical health care, GDP, smoking, alcohol, and animal fat consumption.

Not many surprises here. The authors did discover something they consider to be surprising. "[T]he lifestyle variable with the greatest apparent effect on life expectancy at all ages is the consumption of animal fat." Apparently, developing countries would improve their health outcomes by adding more animal fat to the diet, while developed countries would enhance their health outcomes by reducing fat consumption." At low levels, increasing animal fat consumption seems to fight-off infection, but at high levels it seems to lead to cancer and heart disease.

Their primary finding has to do with pharmaceuticals. "Pharmaceutical consumption appears surprisingly productive. It has positive and statistically significant relationships with the life expectancies at the ages of 40 and 60." According to the authors, pharmaceutical consumption (measured in additional days per 1990 dollar) for the United States increased life expectancy by 1.2 to l.4 days for a 40-year-old and 1.5 to 1.8 days for a 60-year-old. This pattern follows for males and females in all of the 21 countries examined.

According to the authors, "The most interesting result is that countries such as France, Italy, Germany and Belgium--the biggest consumers of drugs--stand to gain the least by marginally increasing their drug consumption. Conversely, the beneficial effect of increased drug consumption is much higher in low-drug-consumption countries such as Ireland, where the effect is roughly five times greater than in France. The results indicate that a country such as Turkey--where drug consumption is extremely low by OECD standards--could dramatically improve life expectancy by increasing pharmaceutical consumption."