In another chapter of the ongoing debate over health care in the U.S., the International Federation of Health Plans Comparative Price Report takes a look at healthcare products and services around the world. The most recent survey (from 2015) looked at seven countries: the United States, the United Kingdom, Switzerland, Australia, New Zealand, South Africa and Spain. Results showed that not only were U.S. healthcare costs elevated compared to the other countries in the survey, but there is also a significant difference in what people pay in the U.S. for the same drug or medical procedure.
Tom Sackville, chief executive of the IFHP, said many people believe, incorrectly, that Americans spend more time in a hospital and more time visiting the doctor or having procedures, which is what drives up prices. "That's not the case. It appears it's quite an efficient system – they don't overuse it," Sackville said. "But each time they have an item, an episode of care, it costs two or three or five times more than it should, by international standards."
In its study, the Federation wanted to prove that the issue is unit costs, not about utilization as many people think. Prices in the U.S. are on a like-for-like basis higher than their counterparts in other countries.
The data for the U.S. were extracted from more than 370 million medical claims and more than 170 million pharmacy claims, which the Federation says reflect prices negotiated and paid to health care providers. Prices from the six other countries were obtained from the private sector provided by one health plan in each nation. When comparing procedures across the seven countries, the Federation ensured that the entire process was "like-for-like, across international boundaries," Sackville said. For example, when comparing the price for a standard MRI scan, the data came from procedures where identical types of machines were used with equal staffing resources per procedure.
Comparing Price Differences
Not only did the Federation conclude that the average price in the U.S. is far higher than anywhere else, but it also found a wide disparity in the prices paid within the U.S. Sackville called the considerable variation in cost "completely unwarranted for any clinical reason."
For example, the average cost in the U.S. for an MRI scan was $1,119, compared to $811 in New Zealand, $215 in Australia and $181 in Spain. However, data showed that the 95th percentile in the price of this procedure in the U.S. was $3,031, meaning some people are paying nearly $3,000 more for a standard MRI scan in the U.S. than the average person in Australia and Spain.
Or take a standard hip-replacement procedure. The average cost in the U.S. is $29,067, which is $10,000 more than the next highest-cost country, Australia. However, the data show that the 95th percentile cost in the U.S. reaches $57,225, $50,000 more than the average price in South Africa and $42,000 more than in New Zealand. The results for knee replacements are much the same. Sackville added that the study suggests that the more expensive procedures are no better than the average or cheap ones.
Source: The International Federation of Health Plans
The researchers also observed the trend in prescription drugs. Avastin, prescribed as a treatment for certain types of cancer, has an average price of $3,930 in the U.S. Switzerland is the second most expensive at $1,752. However, the data found that the 95th percentile in the U.S. paid up to $8,831. Avastin costs $470 in the U.K. Similar trends were observed in Truvada (a treatment for HIV/AIDS), Harvoni (hepatitis C), Humira (rheumatoid arthritis) and Xarelto (blood clot prevention). One outlier was OxyContin, a general painkiller that is the most expensive in the U.K. at $590 per prescription, with the U.S. finishing second in cost at an average of $265. (Note: the prices are based on a 4-week to one-month supply)
Source: The International Federation of Health Plans
Why the U.S. Costs so Much
So why are medical costs considerably more expensive in the U.S.?
According to the researchers, the idea that the U.S. has a higher cost of living that drives up healthcare costs is a common fallacy. Numbeo is a crowd-sourced global database that bi-annually ranks countries by their cost of living. Its 2018 mid-year ranking has the United States at 21st, two places ahead of the U.K. Switzerland is first, New Zealand 17th, Australia 15th, Spain 34th, and South Africa at 70th. So, the overall cost of living seems an unlikely candidate for why healthcare in the U.S. is so expensive.
A lack of competition appears to be closer to the root of the problem, and hospital mergers are one development that has stifled competition. In March 2016, Kellogg School of Management at Northwestern University wrote a paper titled "The Price Effects of Cross-Market Hospital Mergers" in which researchers explored the cost of health care after the consolidation of hospitals in the same geographic market. The report concluded that merged hospitals in similar geographic regions are likely to have had similar customers and insurers, which reduces competition. "The results suggest that cross-market, within-state hospital mergers appear to increase hospital systems’ leverage when bargaining with insurers," the report said.
"We find that hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 6-10 percent relative to control hospitals, while hospitals gaining system members out-of-state show no statistically significant changes in price."
This is a sentiment shared by Tom Sackville, who says, "When there's anti-competitive behavior going on like consolidation of whole hospitals, which ends up driving prices up. No one does anything about it." Sackville added, "this may be not unconnected to the fact that all these people have a lot of lobbyists working in Washington and they are making themselves very amenable to local politicians."
In addition to the consolidation in hospitals, anti-competitive pricing behavior has been facilitated by mergers of health insurance companies. In mid-July 2016, the U.S. antitrust officials sought to block two major acquisitions in the health insurance sector for fear it would reduce competition and drive up prices.
The Bottom Line
Whether it is the consolidation of hospitals and other health services or anti-competitive pricing behavior, healthcare costs in the U.S. are rising at an alarming rate, a rate that far surpasses wage inflation.
Health Affairs has projected that between 2015-2025 spending on health care will grow at 5.8% per year. By 2025, it will make up 20.1% of U.S. GDP. This is a disturbing figure that is trending in the wrong direction.
“There is no reason why identical procedures and products should vary in price so much across countries: it illustrates the damaging effects of an inadequately regulated healthcare market," Sackville said.