The U.S. Healthcare System Kills to Make a Profit
A Look at Why are Americans Pay so Much for So Little
I recently switched to a different healthcare provider and had a serious sticker shock. The provider was one I used several years ago, in a different state, and I was amazed at how much the cost had gone up. That got me wondering: Was it just my provider? Was it having moved to another state? So, off I went to do some research.
U.S. Healthcare vs Other Advanced Countries
It turns out healthcare is getting more expensive all over the world, but much more so in the United States. A lot more.
According to the latest Commonwealth Fund Report, the U.S. is spending almost one-fifth of its GDP on healthcare. This is significantly more than most other developed countries, as represented by the Organisation for Economic Co-operation and Development (OECD).
Of course, the U.S. healthcare system has great technology, researchers, and specialists. That’s why people from all over the world come to the U.S. when they need the best treatment. But here’s the sad part—we’re getting less value out of it!
The life expectancy at birth of an American is the lowest in the OECD as shown in the graph below. Although the unwillingness of many Americans to get the COVID vaccine contributed to some of the most recent reductions in expected lifetime, it is nevertheless a multi-year trend.
A lower life expectancy means that more people are dying from causes other than natural ones, and the 2022 report from the Common Wealth Fund shows the United States is faring worse than the OECD average in almost all categories.
Avoidable deaths: The U.S. has 335 avoidable deaths per 100,000 people versus the OECD average of 225.
Infant deaths. The U.S. had 6.4 infant deaths per 100,000 people versus the OECD average of 4.1.
Maternal deaths: The U.S. had a whopping 23.8 maternal deaths per 1000,000 people versus the OECD average of 9.8. The next closest country (New Zealand) had only 13.6.
Suicide: The U.S. had 14.1 suicides per 100,000 people compared to 11.1 for OECD member states. Suicide is a possible indicator of mental illness.
Death from assault: The U.S. had a staggering 7.4 assault deaths per 100,000 people versus the OECD average of 2.7. While this might be largely a factor of gun-control laws, it is also potentially a symptom of mental illness.
What are the Contributing Factors?
Like me, you might be wondering how this can possibly be happening. It turns out that higher U.S. healthcare expenses are generally attributed to higher prices and higher usage of medical services. But only one of these is clearly the main factor.
Higher Prices
Higher prices are the biggest contributor to rising national healthcare expenses. The prices are being driven significantly higher due to the inefficiency of the current U.S. healthcare system and embedded incentives that are counterproductive to providing low-cost, quality healthcare for everyone.
See the graphic below, which shows categories where comparatively more money is spent on healthcare in the U.S. than in other countries.
As you can see, it is pretty much every category.
Market Structure
The U.S. healthcare system is a combination of private and public entities, which makes it very large and disjointed. There is not a single U.S. healthcare system, but several systems that serve different segments of the population. Most Americans receive their coverage from private health insurance while two major federal government health insurance programs, Medicare and Medicaid, offer coverage for seniors and some of the disabled, and healthcare services for some of the poor and near-poor, respectively.
One of the consequences of this complexity is significant inefficiency, which is in part due to a lack of standardization and integration. Harvard University economics professor David Cutler explains more in the quote below and also contends that some of the inefficiency is profit motivated.
Every health insurer requires a different bar-code-equivalent and payment-systems submission…it is virtually impossible to send medical records electronically from one hospital to another. Almost all hospitals have electronic medical records, but there is no federal requirement that they interface. Indeed, many providers take active steps to avoid electronic interchange, because keeping records local ensures that fewer patients will switch doctors.
Professor Cutler notes that the complexity and profit incentives of the system have created other unique aspects. For example, there are unique jobs like medical-record coders and claim-submission specialists that only exist in the U.S. Also, further adding to the overhead, private insurance companies seek to reduce costs by spending huge amounts on reviewing whether a medical service is covered under a given plan or not.
As a result of these inefficiencies, a 2017 study in the Annals of Internal Medicine found that 34.2% of U.S. healthcare costs were administrative. But, this excess is not just a cost of doing business in the U.S. When you compare the administrative costs of a privately run program against a government-run program like Medicare, you see that Medicare costs between 1.1 and 7%, which is far lower. Thus, Carmen Balber, executive director of Consumer Watchdog summarizes it, saying:
"Medicare ... is drastically cheaper, because we don't spend a lot of time trying to deny people the care they need…There's not as much dedicated to the bureaucracy of health care as there is in private systems."
Pharmaceuticals
Prescription and retail drugs amount to almost 9% of the total healthcare expenses, and the cost of these is significantly higher for Americans. On average, Americans spend over twice as much on prescription drugs than people in other prosperous countries. Due to little regulation in pricing, an American citizen spends an average of $963 on prescription drugs per person, compared to an average of $466 for a citizen of other developed countries.
Many people think the high cost is due to expensive research and development. But those people are wrong. A professor at the London School of Economic and Political Sciences evaluated 60 drugs approved by the FDA and found no relationship whatsoever between the prices of the drugs and their development costs.
Moreover, while products like computers get cheaper over time, pharmaceutical companies routinely raise the prices of even existing drugs. These prices are raised faster than the rate of inflation, even though they are older established drugs and no new research has gone into them. According to the Health System Tracker, pharmaceutical costs as a percentage of GDP have been steadily increasing in the United States over the past 20 years. In 2000, pharmaceutical costs were about 1.4% of GDP. By 2020, they had risen to 2.5% of GDP.
There are commonly given reasons as to why this occurs.
No single-payer negotiation. The U.S. doesn’t negotiate with manufacturers like other countries do.
Lack of government regulation. Pharmaceutical companies charge what the market will bear. Hence a drug like Insulin costs ten times more in the United States than in Canada. In many other countries, the government regulates the cost of medications or facilitates discounts and subsidies
Lack of comparative research. A 2016 study found that a lack of comparative research across drugs is yet another cause for higher drug spending among Americans.
Drug patents and exclusivity. Manufacturers have had patents to protect their innovations that last for many years. As the sole provider of a drug that is critical to a person’s life, the manufacturer can pretty much charge what they want.
Higher Salaries of Medical Personnel
Doctors in the U.S. make quite a bit more than doctors in other countries. According to the Commonwealth Fund report, the average annual salary for a physician in the United States is $313,000, compared to $137,000 in the United Kingdom and $108,000 in Canada.
Factors contributing to this include the following:
A U.S. medical education is among the highest in the world, and doctors typically have a significant amount of debt when they graduate.
There is a shortage of doctors that is expected to worsen in the coming years. As a result, doctors in the United States have a lot of bargaining power, and they are able to command high salaries.
The U.S. culture of medicine has a strong emphasis on competition and achievement. This culture leads to high salaries for doctors, as they are seen as valuable assets.
For-Profit Hospitals
Hospital care accounts for 31% of the nation’s healthcare costs. Expenditures in this category grew 4.4% in 2021 to a total of $1.3 trillion. Here again, there is evidence that costs are often determined by what the market will bear. A study in the Quarterly Journal of Economics showed that prestigious hospitals charge multiple times what less prestigious hospitals do for the same service.
Furthermore, prices in the United States remain high for inpatient services compared to other countries. According to a report released by the Health Care Cost Institute in July 2022,
A hip replacement was $28,167 in the U.S., compared to $16,622 in New Zealand, which was the next most expensive.
Patients paid $11,326 for a C-section in the U.S. The next highest cost was $7,948 in Switzerland.
Higher Utilization
Some researchers claim that Americans just use more medical services than other countries. For example, Dr. Harlan Krumholz, cardiologist, and professor of health policy at Yale School of Medicine, contends:
In many parts of the health care ecosystem, people are paid for volume, and so that fuels an orientation toward, 'We might as well get an extra scan.' ... It's in the economic interest of the hospital, the physician, the health care system when they're being paid fee-for service, and the justification is that more is better."
Additionally, some researchers claim that since healthcare is financed through a combination of private insurance and government programs, there is an incentive for people to use more healthcare services because they are not directly paying for the services they receive. This makes sense, and the 2019 report by the Commonwealth Fund, shows that Americans use about 15% more healthcare services than people in other developed countries for both inpatient and outpatient care. However, Americans also use more preventive care, such as cancer screening, annual physicals, and vaccinations than other countries. So in theory, this should reduce costs long-term.
Another possible cause of greater service utilization could be avoiding litigation. Healthcare is known to be a litigious environment and physicians and hospitals have an interest in preventing lawsuits, so “just in case” tests and scans may be ordered.
Conversely, others have argued that utilization percentages of the U.S. are largely the same as other OECD countries. At any rate, the available data is challenging to compare and has mixed findings as to whether American utilization is a significant cause of the rising costs. Factors already described in this article account for much of the price rise, so it seems reasonable to assume that the contribution of excessive utilization is questionable.
Withdrawal from Medical Care
More evidence against the high utilization argument is that Americans appear to be actually withdrawing from the healthcare system. For example, the 2003 Commonwealth Fund Annual Report stated that the U.S. averaged about the same number of office visits for the year as other developed nations. In 2022, the Commonwealth Fund reported that American office visits were significantly lower than the average of other OECD countries, as shown in the graph below.
Office visit data is hard to acquire and compare, and it also varies qualitatively by time and type of physician visited. But, as a corroborating point, participation in employer-sponsored health insurance is also declining. Alight Research found that an increasing number of workers, especially lower-paid ones, were opting out of employer-sponsored health programs due to the high cost. Thus, in 2021, the Commonwealth Fund reported that 8.6 percent of the U.S. population was uninsured, making the U.S. the only high-income country where a substantial portion of the population lacks any form of health insurance. This is shown below.
Harvard professor David Cutler concurred, stating:
Nearly half of Americans say they have delayed or skipped medical care because of the cost. People who face higher costs for medical care are diagnosed with cancer at later stages of the disease and take fewer medications. Even the very sick use less care when their out-of-pocket costs rise. Health suffers.
In fact, the National Library of Medicine notes a number of areas where American health habits are worse than other nations. These are some of them:
Drug-related mortality: Americans lose more years of life to alcohol and other drugs than people in peer countries, even when deaths from drunk driving are excluded.
Obesity and diabetes: For decades, the United States has had the highest obesity rate among high-income countries. High prevalence rates for obesity are seen in U.S. children and in every age group thereafter. From age 20 onward, U.S. adults have among the highest prevalence rates of diabetes (and high plasma glucose levels) among peer countries.
Heart disease: The U.S. death rate from ischemic heart disease is the second highest among the 17 peer countries.
Chronic health conditions. Around 60% of Americans live with at least one chronic health condition, while more than 25% of adults in America have been diagnosed with two or more chronic conditions, like cancer, diabetes, heart disease, asthma, or hypertension, during their lifetime. This rate is nearly two times as high as those reported in the Netherlands and the United Kingdom.
Chronic lung disease: Lung disease is more prevalent and associated with higher mortality in the United States than in the United Kingdom and other European countries.
The pattern of these findings suggests a downward spiral where people are cutting costs that result in taking less care of their health, leading long-term to higher expenses both for themselves and the nation down the road.
Your Decision Matters
We have seen that costs are rising, and the current U.S. system is not keeping pace with other prosperous countries when compared to national averages. Not only is this making overall health worse, but it is also a big part of the U.S. budget problem and a threat to the competitiveness of American companies. In fact, renowned investor Warren Buffet has famously said
Medical costs are the tapeworm of American economic competitiveness.
In common thinking, the free market produces more innovative and cost-effective solutions due to competition and buyers being able to choose, while governments are hobbled by bureaucracy. But the evidence demonstrates the reverse is the case in healthcare. Free-market solutions have so far contributed to—not improved—the situation because there is insufficient competition and consumers are held hostage by a choice between buying a medical offering or suffering health consequences.
In other countries, government-run programs have been more efficient and better able to use their leverage and legislative power to get better pricing. They have taken actions such as these.
Guaranteeing health insurance for all citizens
Negotiating with manufacturers to lower prices
Implementing price regulations
Smoothing out and streamlining the medical system
Maybe there is still a private-sector solution out there, but none has shown up yet and the structure of the market makes it challenging. For example, heavyweights Warren Buffet, JP Morgan, and Amazon combined to create Haven in 2018, which was supposed to offer superior health plans to thousands of employees. But the venture failed spectacularly after only three years, in part due to the inability to partner with the existing healthcare industry.
The U.S. government must intervene in some way. Maybe the solution is encouraging, or clearing the way for, better private industry solutions. Maybe it is expanding government-run healthcare. But so far no solution has emerged largely due to governmental paralysis stemming from a polarized political environment that misleadingly pits free-market purists against progressive reform.
Ultimately, the voters still matter. In the upcoming debates over the 2024 appropriations bills in Congress, you will see the two political parties posturing to influence their voters. But, with this background, you can now consider the solutions put forth by both parties from a position of knowledge and vote appropriately.
Thanks for reading!