Why is American Healthcare so expensive?

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Source: Forbes

$3.6 trillion or 17.7% of America’s GDP is spent on healthcare every year – nearly twice that of the average OECD country.(1)(2) Despite this, Americans do not have better measurable health outcomes. Healthcare expenditures have been rising since the 1960s, and this is in part due to new healthcare treatments, higher utilisation, and better coverage. But it is also because the price of healthcare has risen significantly over the years. 66.5% of bankruptcies in America – an estimated 530,000 families – are linked to the inability to pay medical bills,(3) and there are a number of forces tied to this phenomenon.

  1. Health insurance is very complex and increases administrative costs for the government
  2. Hospitals elevate price levels in geographic regions with little competition or greater bargaining power
  3. Lobbying efforts by the pharmaceutical industry have loosened patent protection regulations and allowed drug monopolies to exist

Health Insurance

Health insurance companies and their large array of insurance plans increase red tape for providers and complicate payment structures for patients. A study found that only 4% of the 2000 health insurance consumers surveyed could accurately define elements of their payment model, like their plan’s deductible amount, coinsurance rate, out-of-pocket maximum, or the co-pay – 25 percentage points lower than the percentage of people who thought they could define the terms.(4) Half of the participants were “somewhat confident” in their ability to select the right health insurance plan for their needs – with 12% saying that they were not confident “at all”.

The overwhelming number of choices for consumers deepens confusion about what they are entitled to, and this is beneficial for insurance companies because it limits pay-out and reduces their risk. It also causes patients to fear unexpectedly high bills for their medical treatments due to factors out of their control, like being treated by an out-of-network doctor. Coordinating this multi-plan system makes up the majority of administrative costs for the provider, and is one of the main reasons why healthcare is so expensive for the government.(5)

Hospital Monopolies

During the Great Recession of 2008, many Americans delayed medical care because they had lost their employer-based insurance plan along with their job. During the current COVID-19 recession too, more than 5 million Americans have lost their health insurance - as of May 2020 - and the consequent financial burden felt by hospitals as a result of falling demand will lead to the vertical merger of many hospital groups to cut costs and increase efficiency.(6)(7)  These mergers increase the efficiency of operations, giving hospitals a larger network and thus, more bargaining power over insurance companies - particularly where insurance markets are saturated. Prices for services have increased in such regions and resulted in wildly varied prices between geographic markets. For example, the cost of a COVID-19 urgent care visit averages $1,696 but can range from a low of $241 to a high of $4,510 depending on the provider.(8)

Aneesh Krishna, a partner at McKinsey and author of infographic on healthcare during economic downturns, recommends that hospital leaders should plan for and expect acquisitions during this recession.(9) He says this in light of the 17.3% decline in healthcare expenditures between the Q4 in 2019 and Q1 in 2020, as patient volumes fell dramatically.(10) These mergers and acquisitions may monopolise healthcare in certain regions, thereby driving up costs for those patients.

High drug prices

Source: CNBC

Unlike other countries, the US government cannot negotiate prices of healthcare. This is because of the lack of support for a centrally controlled healthcare system, which was historically associated with socialism. Today, the private healthcare sector holds significant influence over the industry. “In 2019, the pharmaceuticals and health products industry spent the most on lobbying efforts, totalling to about $295.17 million”,(11) to maintain monopoly pricing and patent protection regulations. These regulations encourage investment into research and development as they grant marketing exclusivity to patent-holders. The large R&D budgets of pharmaceutical companies have proved incredibly useful during a pandemic like COVID-19, where upwards of $1 billion have been committed to research efforts on finding a vaccine.(12)

However, Medicare, which pays a large percentage of national drug costs, is not permitted to negotiate prices with manufacturers. Deregulated patent protections drive up healthcare expenditures for the government. Additionally, persistently high drug prices are also unethical as they force patients to spend unsustainable recurring sums of money on treatments and drugs. Stories of illnesses and injuries with financial consequences so severe that they caused households to file for bankruptcy were a major argument in support of the 2010 Affordable Care Act. Now, as we move towards a post-COVID-19 world, healthcare reform is inevitable and only time will tell how the aforementioned forces are transformed to better serve the American people.

  1. Roosa Tikkanen and Melinda K. Abrams, "U.S. Health Care from a Global Perspective, 2019: Higher Spending, Worse Outcomes?," last modified 2020.
  2. Centers for Medicare and Medicaid Services, "Historical," CMS, last modified December 17, 2019, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.
  3. Dan Mangan, "Many Americans Don't Know Much About Health Insurance — and It Will Cost Them," CNBC, last modified November 7, 2016, https://www.cnbc.com/2016/11/04/many-americans-dont-know-much-about-health-insurance--and-it-will-cost-them.html.
  4. Policy Genius, "4 Health Insurance Terms 96% of Americans Don't Know," Policygenius, last modified January 24, 2018, https://www.policygenius.com/health-insurance/health-insurance-literacy-survey/.
  5. Joshua D. Gottlieb and Mark Shepard, "How Large a Burden Are Administrative Costs in U.S. Health Care?," Econofact, last modified November 7, 2018, https://econofact.org/how-large-a-burden-are-administrative-costs-in-health-care.
  6. Sarah Kliff, "So you want to buy a hospital…," The Washington Post, last modified March 15, 2013, https://www.washingtonpost.com/news/wonk/wp/2013/03/15/so-you-want-to-buy-a-hospital/.
  7. Sheryl G. Stolberg, "Millions Have Lost Health Insurance in Pandemic-Driven Recession," The New York Times - Breaking News, World News & Multimedia, last modified July 13, 2020, https://www.nytimes.com/2020/07/13/us/politics/coronavirus-health-insurance-trump.html.
  8. Lisa L. Gill, "Paying for Healthcare in the Age of Coronavirus," Consumer Reports, last modified April 30, 2020, https://www.consumerreports.org/healthcare-costs/paying-for-healthcare-in-the-age-of-coronavirus/?utm_campaign=Economic%20Studies&utm_source=hs_email&utm_medium=email&utm_content=86547625
  9. Emily Rappleye, "McKinsey: How Hospitals Can Become More Recession-proof," Becker's Hospital Review - Healthcare News, last modified July 12, 2019, https://www.beckershospitalreview.com/strategy/mckinsey-how-hospitals-can-become-more-recession-proof.html.
  10. Andrew Elzinga and Avigail Kifer, Expectations for Healthcare Mergers During the Pandemic, (The National Law Review, 2020), https://www.natlawreview.com/article/expectations-healthcare-mergers-during-pandemic.
  11. Karl Evers-Hillstrom, "Big Pharma Continues to Top Lobbying Spending," OpenSecrets News, last modified October 25, 2019, https://www.opensecrets.org/news/2019/10/big-pharma-continues-to-top-lobbying-spending/.
  12. John LaMattina, "Fate Of Pharma’s Reputation Lies In Gilead’s Hands On Pricing Of Covid-19 Drug Remdesivir," Forbes, last modified June 8, 2020, https://www.forbes.com/sites/johnlamattina/2020/06/08/fate-of-pharmas-reputation-lies-in-gileads-hands-on-pricing-of-covid-19-drug-remdesivir/.
More posts by Tanya Venkatesh.
Why is American Healthcare so expensive?
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