Why is healthcare so expensive?

Americans spend a lot of money on healthcare yearly - $3.3 trillion in 2016 to be exact or $10,348 for every man, woman, and child. This is 18% of our GDP (National Health Expenditure Accounts). The average GDP spending in the other 10 high-income countries (Canada, Germany, U.K., Denmark, Sweden, France, Japan, Australia, Switzerland, and the Netherlands) is only 11.5%. This is according to a March 2018 article in the Journal of the American Medical Association (JAMA). The authors compared the healthcare systems of these 11 highly industrialized countries. This included the U.S. and nations with single payer health systems like the U.K. and Canada and those with competitive insurance markets like Switzerland and the Netherlands. Their major focus was healthcare expenditures. 

This high rate of spending in the U.S. compared to the other countries might be acceptable if the U.S. had consistently better health outcomes than these other countries. However, that is not the case. Even with all the money we spend on our healthcare, the World Health Organization ranked the U.S. thirty-seventh in overall healthcare, and the Commonwealth Fund placed the U.S. last among these 11 largest industrialized countries in overall healthcare. We also placed last in life expectancy among these 11 nations according to the JAMA report. 

So why are our costs so high and our outcomes so low? A little historical perspective is instructive because these differences were not always the case. America was right in the middle of the pack of peer nations in per capita health spending and life expectancy at birth through about 1980. However, by the mid- 2000’s we were at the bottom of the pack according to a May, 2018 New York Times analysis. What triggered this precipitous fall explains much about why our system is so expensive. 

As healthcare costs began to rise in the early 1980’s, other industrialized countries began to put limits on healthcare prices and spending. They did this mainly through enactment of government policies to hold down spending. The U.S. instead relied on market forces and competition. This has proved less effective according to Paul Starr, a public affairs professor at Princeton. As healthcare spending rose, U.S. health systems consolidated creating low levels of competition which contributed to higher prices. There were (and are now) few government policies in place to stop this consolidation and lack of competition. There was (and still is) a lot of incentive to increase prices and profits.

So a real difference is the pricing of healthcare goods and services in the U.S. when compared to the other 10 industrialized countries. Prices are much higher in the U.S. We pay more for hospitalizations, medical equipment, and physician services. Interestingly, the JAMA article did not find that Americans spent more days in the hospital or used doctors more. In fact, the U.S. was below the average on these measures. Also, the report did not find that the U.S. had excessive numbers of medical specialists compared to the other high-income countries. The report concludes that we pay more because our medical procedures cost more. It is not because we use more healthcare or that we rely more on costly specialists.

Another major difference is the cost of drugs. The U.S. spends $1,443 per capita on pharmaceuticals while the average for all of other 10 industrialized countries is $749 per capita. In these other countries the government negotiates with drug makers on pricing. In the U.S. only the Veterans Administration and the Medicaid program are permitted to negotiate drug prices. Medicare is denied that right. Drug makers argue that the U.S. spends more because most drug research and innovation takes place here. The JAMA report does note that the U.S. accounts for 57% of the total global production. Still the report concludes that “whether innovation justifies [this] high level of spending is not clear.”

Administrative costs in the U.S. system are also high. About one quarter of the total healthcare costs are associated with administration (about 8% of our GDP). Other industrialized countries average 1-3% of GDP. David Cutler, a healthcare expert, gave the following example of Duke University hospital. The hospital has 1300 billing clerks for the 900-bed facility. These billing specialists are needed to determine how to bill the varying requirements of multiple insurers. 

One notable finding of the JAMA report is that the quality of care in the U.S. fared well against the other industrialized countries. For example, long wait times for treatment are not an issue in the U.S. as they can be elsewhere. Also, in treating heart attacks and strokes, the U.S. has the best record. While quality of care is generally good, that metric presumes that individuals have health insurance. Unfortunately, we have the least access to health care services among the other 10 industrialized countries according to the report. 

In fairness, none of the 11 industrialized countries have developed a magic bullet to control healthcare costs. However, the other 10 countries have done a better job by having the government play a major role in controlling those costs. They have lower administrative costs and negotiate for lower drug prices, medical equipment, and hospital costs. Americans are waking up to this need for greater governmental involvement in healthcare. In a July 2017 Kaiser Family Foundation poll, 53% of respondents favored a single payer, Medicare-for-all health system. This would have been a radical idea 10 years ago. 

By converting to a single payer system, the editors of the Annals of Internal Medicineestimated in July 2017 that we could save $504 billion yearly. Converting to a single payer system would not mean higher prices for ordinary Americans. Instead of paying healthcare premiums, the program would be funded through progressive income and corporate taxes. And coverage would be comprehensive and universal meaning everyone would be covered regardless of income. Even a conservative, Koch Brothers sponsored study in July 2018 by George Mason University concluded that a single payer, Medicare-for-all plan would save the U.S. over two trillion dollars over 10 years. 

It’s time for our leaders to also step forward on this issue. A good start would be proposing a single payer system. We certainly can do better for the health of our citizens. 

Tom DeLoe, PhD, is a member of the Adams Hanover Healthcare Forum. He lives in Gettysburg.