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...