6 Reasons Healthcare Is So Expensive in the U.S.

Healthcare in the U.S. is about twice as expensive as it is in any other developed country. If the $3 trillion U.S. healthcare sector were ranked as a country, it would be the world’s fifth largest economy, according to Consumer Reports. The cost of this huge financial burden for every household because of lost wages, higher premiums, taxes and additional out-of-pocket expenses is more than $8,000. 

Even with all this money being spent on healthcare, the World Health Organization ranked the U.S. 37th in healthcare systems, and The Commonwealth Fund placed the U.S. last among the top 11 industrialized countries in overall healthcare. 

Why is the U.S. paying so much more for care and not appearing at the top of the rankings? Here’s a look at six key reasons the U.S. is failing to provide adequate health care at reasonable prices.

The number one reason our healthcare costs are so high, says Harvard economist David Cutler, is “the administrative costs of running our healthcare system are astronomical. About one-quarter of healthcare cost is associated with administration, which is far higher than in any other country.” 

One example Cutler brought up in a 2010 discussion on this topic with National Public Radio was the case of the 1,300 billing clerks at Duke University Hospital, which has only 900 beds. Those billing specialists are needed to determine how to bill to meet the varying requirements of multiple insurers. Canada and other countries with a single-payer system don’t require this level of staffing to administer healthcare.

Another major difference in health costs between the U.S. and every other developed nation is the cost of drugs. In most countries, the government negotiates drug prices with the drug makers, but when Congress created Medicare Part D, it specifically denied Medicare the right to use its power to negotiate drug prices. The Veteran's Administration and Medicaid, which can negotiate drug prices, pay the lowest drug prices. The Congressional Budget Office has found that just by giving the low-income beneficiaries of Medicare Part D the same discount Medicaid recipients get, the federal government would save $116 billion over 10 years. Think of what the savings might be if all Medicare recipients could benefit from Medicaid-negotiated drug prices.

Yet another big driver of the higher U.S. health insurance bill is the practice of defensive medicine. Doctors are afraid they will get sued, so they order multiple tests even when they are certain they know what the diagnosis is. A 2010 Gallup survey estimated that $650 billion annually could be attributed to defensive medicine. Everyone pays the bill on this with higher insurance premiums, co-pays, and out-of-pocket costs, as well as taxes that go toward paying for governmental healthcare programs.

U.S. medical practitioners also tend to use a more expensive mix of treatments. According to a 2014 report by the OECD, when compared with other developed countries, for example, the U.S. uses three times as many mammograms, two-and-a-half times the number of MRIs and does 31% more Cesarean sections. This results in more being spent on technology in more locations. Another key part of the mix is more people in the U.S. are treated by specialists, whose fees are higher than primary-care doctors when the same types of treatments are done at the primary-care level in other countries. Specialists command higher pay, which drives up the costs for everyone.

Wages and staffing also drive up costs in healthcare. Specialists are commanding high reimbursements, and the over-utilization of specialists through the current process of referral decision-making drives health costs even higher. The National Commission on Physician Payment Reform was the first step toward fixing the problem; based on its 2013 report, the commission adopted 12 recommendations for changes to get control over physician pay. The Commission has gone on to work with Congress to find a way to implement some of these recommendations, although tangible policy outcomes have not yet followed.

“There is no such thing as a legitimate price for anything in healthcare,” says George Halvorson, the former chairman of health maintenance organization Kaiser Permanente. “Prices are made up depending on who the payer is.”

Providers who can demand the highest prices are the ones who create a brand everyone wants. “In some markets, the prestigious medical institutions can name their price,” says Andrea Caballero, program director at Catalyst for Payment Reform, a nonprofit that works with large employers to get some control on health costs. 

The Affordable Care Act (ACA) has pushed back to some degree against the high costs created by branding. In central Florida, for example, one of the top brands is Florida Hospital. In 2018, ACA policies offered by Humana did not include services provided by this brand. Similar types of contract negotiations knocked out top hospitals in other locations. It remains to be seen whether this will cause those hospitals to reduce prices to get those patients back.

Most other developed countries control costs, in part, by having the government play a stronger role in negotiating prices for healthcare. Their healthcare systems don’t require the high administrative costs that drive up pricing in the U.S. As the global overseers of their country's systems, these governments have the ability to negotiate lower drug, medical equipment and hospital costs. They can influence the mix of treatments used and patients’ ability to go to specialists or seek more expensive treatments. 

So far in the U.S., there has been a lack of political support for the government taking a larger role in controlling healthcare costs. The Affordable Care Act focused on ensuring access to healthcare but maintained the status quo to encourage competition among insurers and healthcare providers. This means there will be multiple payers for the services and less control over negotiated pricing from providers of healthcare services.