You’ve seen the headlines about the United States having the highest healthcare costs in the world. Keeping Americans healthy is a $3 trillion dollar industry that eats up nearly 18% of the country’s gross domestic product.  

Yet for all the money we spend on doctors, procedures and drugs (about $8,000 per person per year), research shows we don’t get a better return on our investment than counties that spend less. In a 2014 study of 11 healthcare systems in developed nations, the United States ranks fifth in quality and last in infant mortality.

Medicine doesn’t have to be expensive. Canadians, Germans and the French spend no more than half of what Americans do out of pocket on healthcare in a year. 

What’s behind the high price of health care? The answers are simple, yet complex; obvious, yet somewhat surprising.

Higher Price Tags, Not More Use Of Services

Everything related to healthcare in the U.S. costs more than in other countries – and that expense is passed on to the consumer. Americans don’t actually see a medical professional more often, and they don’t have longer hospital stays, than residents of other countries. Even so, researchers find that the price of goods and services are higher. 

A look at 23 medical services and procedures performed in different countries revealed that in 22 cases Americans paid higher prices than did patients in other developed countries, according to a survey of members of the International Federation of Health Plans.

The U.S. has an expensive mix of services -- high-tech screenings, specialists, elaborate amenities -- that fuel high prices. One example: Compared with other developed countries, and adjusting for population differences, the U.S. performs more than twice as many MRI scans and three times as many mammograms. 

And health care in the U.S. is subject to economic forces such as inflation, which continually drives up the price – and does so at a higher rate than other goods and services. From 1987 to 2006, the overall inflation was 84%; healthcare inflation during that time was 214%.

The Consumer Is Usually Not The Direct Payer

Since most Americans receive health care through insurance provided by their employer or the government (in the case of Medicare or Medicaid), they are removed from the cost. And not caring about the bottom line means that providers can raise prices without consumers noticing much. There is little pressure to comparison shop; when people do, it can be difficult to get a clear estimate of the cost of procedures. (You may be interested in Preserving Wealth Despite High Health Care Costs.)

High Profit Margins Are Protected, Not Negotiated

Over the past two decades, the cost of prescriptions increased at three times the rate of overall healthcare spending. Companies are reluctant to let their proprietary drugs become generic, which would cut the cost to consumers but also lower revenue for the manufacturer. In recent years, profit margins have been as high as 20% for medical device and pharmaceutical companies. 

In countries, such as the United Kingdom, where health care is covered by the government, officials can negotiate the best prices for consumer, bringing down overall costs. In developed countries, government typically pays for about 75% of medical care; in the U.S. it only covers about half, and legislation keeps it from exerting much bargaining power.

Multiple Inefficiencies In The U.S. System

In the U.S. payment is also based on procedures, so there’s little incentive for medical providers to limit tests or therapies. That can result in more services, ramping up expenses paid by insurance companies, which then pass it on to consumers.

Because of the array of insurance plans and the paperwork necessary to process claims, much of what happens at a hospital or doctor’s office is not medical at all. Unlike countries with centralized, single-payer systems, having private insurance means that about 25% of the cost of healthcare is administrative.

Because participants enter in a risk pool, about three-quarters of policyholders pay for the expenses incurred by about one-quarter of those with chronic health problems. 

On indicators of efficiency, the U.S. ranked last among the 11 countries in the most recent  Commonwealth Fund study; the U.K. and Sweden came in first and second.

The Competitive Model Can Drive Up Some Costs

As medical providers compete for patients, they invest in equipment, posh offices, marketing and private rooms that increase their expenses. That also creates redundancies and inefficiencies, another factor leading to higher prices. Their fees must be high enough to cover the significant costs of malpractice insurance. 

The Bottom Line

It’s still uncertain what the impact of the Affordable Care Act will be, though a new report by the Commonwealth Fund shows that the ACA has already slowed premium growth in healthcare costs and if this trend continues it will be significant. The hope is also that with more families covered and preventive care encouraged, costs will come down. And, as more consumers find out about the real cost of treatment and seek out smaller medical networks, Americans can help rein in expenses. 

 

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