Why is health care so expensive in the United States?

The U.S. as a nation spends more on health care than any other developed country but has worse health outcomes. How is this possible?
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/ Source: TMRW

Amid the coronavirus epidemic, many of us have been living in fear of needing health care. For some, it's due to the risk of catching COVID-19 during a doctor's office or hospital visit; for others, it's because of how expensive health care is. These days, all it takes is one surprise medical bill to send a patient into bankruptcy.

The United States' health care system operates differently from many others in the world, with high costs for the individual as a main, distinguishing characteristic. In fact, the higher prices mean the U.S. spends more on health care than other "developed countries," a 2019 Johns Hopkins report found.

What's more, almost one in three Americans worries about affording health care, according to a February 2020 survey from NBC News. (Just recently, a man who was hospitalized with COVID-19 for 62 days received a $1.1 million medical bill.)

So, what exactly makes health care in the U.S. so expensive? Health insurance prices? Government regulation — or lack thereof? The pharmaceutical industry? TMRW talked to experts on different aspects of the health care system who pointed to five overall reasons.

Why is health care so expensive?

The most salient reason is that U.S. health care is based on a "for-profit insurance system," one of the only ones in the world, according to Carmen Balber, executive director of Consumer Watchdog, who's advocated for reform in the health-insurance market.

In the U.S., most health insurance is administered by private companies and individuals must pay for it themselves, even if their employer subsidizes some of it. In contrast, "lots of other countries have some element of private something, but there is that baseline understanding that health care is a right, not a privilege," Balber said.

The underlying motive to make money has a ripple effect that increases prices, she continued. For example, insurance companies spend an "enormous amount of money on utilization review," the process that determines whether a medical service is covered under a given plan, adding that the goal is "to not pay consumers for the care they thought they were insured for."

Similarly, Dr. Georges Benjamin, executive director of the American Public Health Association, pointed to a lack of universal health care, where everyone is guaranteed access without undergoing financial hardship, as a primary reason for high costs.

"Part of our system is that everybody is ... paying for somebody else's underpayment, whether they like it or not," he said. "Everybody is trying to figure out who else can pay for it instead of them."

U.S. health care is highly fragmented

Benjamin called out the complex and fragmented structure of U.S. health care — from billing to care delivery — which can unnecessarily prolong administrative processes and increase overhead. A recent study found that in 2017, administrative costs made up 34.2% of health care costs in the U.S., twice the percentage in Canada, which has a decentralized, publicly funded system.

Another example: Medicare, the country's national health insurance program for Americans 65 and older, has much lower administrative costs, between 1.1 and 7%.

"Medicare ... is drastically cheaper, because we don't spend a lot of time trying to deny people the care they need," Balber said. "There's not as much dedicated to the bureaucracy of health care as there is in private systems."

We pay per service.

U.S. health care exists in a system where patients are charged based on the services they receive, yet another reason why "almost everything is more expensive here," Dr. Harlan Krumholz, cardiologist and professor of health policy at Yale School of Medicine, told TMRW.

"We have higher utilization of a lot of different services," he explained. "In many parts of the health care ecosystem, people are paid for volume, and so that fuels an orientation toward, 'We might as well get an extra scan.' ... It's in the economic interest of the hospital, the physician, the health care system when they're being paid fee-for-service, and the justification is that more is better."

As a result, there's lower use of primary care, Benjamin said, because the fee-for-service model "encourages overutilization."

"Instead of taking people in a room, examining them, taking the history and spending the time talking to patients, we ... do all the complicated stuff," he added. "We're quick to jump to getting the CAT scan and diagnostic test when a history and physical exam would tell you the answer."

Balber argued that fee-for-service creates a "perverse incentive" to provide more procedures, instead of helping patients get healthier so that the nation as a whole needs fewer procedures. The U.S. also spends less than other countries on social support systems and long-term care, Benjamin added.

Lack of government regulation

This is perhaps the most challenging reason to disentangle, but the main idea is this: The companies that provide and charge for health care, like hospital systems and drug makers, have more power to keep costs high when they're negotiating with multiple potential payers, like various private insurance companies. But when they must negotiate with a single payer, like the federal government, there's more pressure to meet the demand in order to sell their services.

For example, a recent study found that private insurance companies paid almost two and a half times what Medicare would've paid for the same medical service at the same facility.

To make matters more costly, the U.S. government doesn't regulate what most companies in the health care space can charge for their services, whether it's insurance, drugs or care itself.

"It's a really poignant argument right now, when you can point to companies that are developing COVID vaccines with government money, and they're going to charge us a fortune for their vaccine," Balber added.

Consolidation of insurance and hospital systems

While U.S. health care system itself may be fragmented, in many parts of the country, there's only one or two companies providing health insurance or medical care. This means that, again, there's little to no incentive for them to lower costs since patients don't have much of a choice.

"We keep approving more and more mergers that raise costs significantly," Balber said. "Then those hospitals buy up all of the private physicians ... and then profit motive is streamlined all the way down to your primary-care doctor."

What's more, health care providers are paid, on average, much more in the U.S. than in other countries, both Benjamin and Krumholz stressed.

"Despite the enormous cost that we have in America for health care, we don't get the same value of our health care dollar as other nations do," Benjamin added. "If you get sick, this is the place to be, no doubt about that, but ... we don't have a system with everybody in and nobody out."