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

And why we get less bang for our bucks

The pressure on our sprawling healthcare system in the U.S. has never been greater. Massive federal cash influxes have sought to shore up hospitals sagging under the weight of the testing and treatment burden and the related temporary cessation of elective surgery and regular medical care that occurred in 2020 and is reemerging in the second half of 2021.

Long before this crisis, the U.S. led other industrialized nations in high spending on healthcare and getting a low bang for the buck in terms of health outcomes and the percentage of the population served. Life expectancy in the U.S., for example, is 78.8 years, while it ranges from 80.7 to 83.9 in 10 other high-income countries, according to an influential study in the Journal of the American Medical Association (JAMA). And only 90% of the population in the U.S. has health insurance, compared to 99% to 100% of the population in the other industrialized countries examined.

Key Takeaways

  • The events of the past 18 months have increased pressure on our highly complex and expensive healthcare system, making it more urgent to lower costs.
  • One reason for high costs is administrative waste. Providers face a huge array of usage and billing requirements from multiple payers, which makes it necessary to hire costly administrative help for billing and reimbursements.
  • Americans pay almost four times as much for pharmaceutical drugs as citizens of other developed countries.
  • Hospitals, doctors, and nurses all charge more in the U.S. than in other countries, with hospital costs increasing much faster than professional salaries.
  • In other countries, prices for drugs and healthcare are at least partially controlled by the government. In the U.S. prices depend on market forces.

Costly Healthcare Hurts Everyone

The high cost of healthcare affects everyone, sick or well. It has depressed individual spending power for the past few decades. Salaries for American workers have risen, but net pay has stayed the same because of increasing charges for health insurance. Today, tightening up on overspending is urgent to help stretch medical and hospital resources to deal with the pressure on the overall system.

Here are six underlying reasons for the high cost of healthcare in the U.S.

1. Multiple Systems Create Waste

“Administrative” costs are frequently cited as a cause for excess medical spending. The U.S. spends about 8% of its healthcare dollar on administrative costs, compared to 1% to 3% in the 10 other countries the JAMA study looked at.

The U.S. healthcare system is extremely complex, with separate rules, funding, enrollment dates, and out-of-pocket costs for employer-based insurance, private insurance from healthcare.gov, Medicaid, and Medicare, in all its many pieces. In each of these sectors consumers must choose among several tiers of coverage, high deductible plans, managed care plans (HMOs and PPOs) and fee-for-service systems. These plans may or may not include pharmaceutical drug insurance which has its own tiers of coverage, deductibles, and copays or coinsurance.

For providers, this means dealing with myriad regulations about usage, coding, and billing. And, in fact, these activities make up the largest share of administrative costs.

2. Drug Costs Are Rising

On average, Americans shell out almost four times as much for pharmaceutical drugs as citizens of other industrialized countries pay. High drug prices are the single biggest area of overspending in the U.S. compared to Europe, where drug prices are government regulated, often based on the clinical benefit of the medication.

With little regulation of drug prices, the U.S. spends an average of $1,443 per person, compared to $749, on average, spent by the other prosperous countries studied. In the U.S. private insurers can negotiate drug prices with manufacturers, often through the services of pharmacy benefit managers. However, Medicare, which pays for a hefty percentage of the national drug costs, is not permitted to negotiate prices with manufacturers. 

3. Doctors (and Nurses) Are Paid More

The average U.S. family doctor earns $218,173 a year, and specialists make $316,000—way above the the average in other industrialized countries. American nurses make considerably more than elsewhere, too. The average salary for a U.S. nurse is about $74,250, compared to $58,041 in Switzerland and $60,253 in the Netherlands. 

U.S. managed care plans (HMOs and PPOs) may succeed in lowering healthcare costs by requiring prior authorization for seeing a high-priced specialist. Use of a nurse practitioner instead of a family doctor can also save money.

$11,170

The cost of a hospital birth in the U.S., which is over $7,000 more than the cost in the Netherlands.

4. Hospitals Are Profit Centers

Hospital care accounts for 33% of the nation’s healthcare costs. Between 2007 and 2014, prices for inpatient and outpatient hospital care rose much faster than physician prices, according to a 2019 study in Health Affairs. U.S. prices for surgical procedures in hospitals greatly exceed those of other countries. A typical angioplasty to open a blocked blood vessel, for example, costs $6,390 in the Netherlands, $7,370 in Switzerland, and $32,230 in the United States. Similarly, a heart bypass operation in the U.S. costs $78,100 compared to $32,010 in Switzerland.  

Today, many hospitals are on the brink financially. What's more, the cessation of elective surgery and severely declining provider visits because of the coronavirus lockdown account for a big part of the decline in the overall economy.

5. U.S. Healthcare Practices Defensive Medicine

Both physicians and hospitals have an interest in preventing lawsuits, so “just in case” tests and scans may be ordered. And these tests can be costly! While a CT scan costs just $97 in Canada and $500 in Australia, the average cost is $896 in the U.S. A typical MRI scan costs $1,420 in the United States, but around $450 in Britain. Researchers have concluded that it’s not the sheer number of tests and procedures but their high price that explains why it’s so expensive to be sick in the U.S. 

6. U.S. Prices Vary Wildly

Because of the complexity of the system and the lack of any set prices for medical services, providers are free to charge what the market will bear. The amount paid for the same healthcare service can vary significantly depending on the payer (i.e. private insurance or government programs, such as Medicare or Medicaid) and geographical area.

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 treatments used and patients’ ability to go to specialists or seek more expensive treatments. Consumers may have fewer choices, but costs are controlled.

In the U.S., a lack of political support has prevented the government from 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.

Now that the costs related to the healthcare crisis of 2020 and 2021 threaten to swamp both the healthcare system and government budgets, the time for change may be at hand. In the mean time, it's important for each person to do their research so that they can find the best health insurance company to suite their needs.

Article Sources

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