Healthcare in the U.S. costs about twice as much as it does 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 to every household because of lost wages, higher premiums and taxes plus 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. thirty-seventh 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 healthcare at reasonable prices.
1. Administrative Costs
The number one reason our healthcare costs are so high, says Harvard economist David Cutler, is that “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 discussion on this topic with National Public Radio was 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 that have a single-payer system don’t require this level of staffing to administer healthcare.
2. Drug Costs
Another major difference in health costs between the U.S. and every other developed nation is the cost of drugs. The public definitely believes drug costs are unreasonable; now politicians are starting to believe that too. 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!
3. Defensive Medicine
Yet another big driver of the higher U.S. health insurance bill is the practice of defensive medicine. Doctors are afraid that they will get sued, so they order multiple tests even when they are certain they know what the diagnosis is. A 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.
4. Expensive Mix of Treatments
U.S. medical practitioners also tend to use a more expensive mix of treatments. 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 31% more Caesarean sections. This results in more being spent on technology in more locations. Another key part of the mix is that 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 the costs up in the U.S. for everyone.
5. Wages and Work Rules
Wages and staffing drive costs up in healthcare. Specialists are commanding high reimbursements and the overutilization 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 in fixing the problem; based on its 2013 report, the commission adopted 12 recommendations for changes to get control over physician pay. Now it is working with Congress to find a way to implement some of these recommendations.
“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 that create a brand everyone wants. “In some markets the prestigious medical institutions can name their price,” says Andrea Cabarello, 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. This year 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.
The Bottom Line
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 most recent legislation, 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 powerful control over negotiated pricing from providers of healthcare services.