Why is healthcare so expensive in the US?
The U.S. healthcare system is known to be the most expensive among developed countries. Consumers are well aware of this issue, as many struggle to pay their insurance fee every month and the number of uninsured is still quite significant (13.4% of the population in 2014). Healthcare in the U.S. is a trillion dollar industry, representing 18% of the gross domestic product. According to the World Health Organization, each American spends on average over $9,000 every year on doctors and drugs, and prices keep on rising every year, at a higher rate than most sectors. Between 1987 and 2006, if the overall inflation rate was of 84%, it reached 214% for healthcare services, as stated by Investorpedia.
Spent in healthcare in the U.S. is an ongoing debate. Outside the political debate, the fact is that understanding the reasons that lead to the constant increase in costs is essential for anyone who aims at innovating in that field and contribute to the sustainability of the system.
This is why we listed 5 reasons to help you understand why healthcare is so expensive in the U.S.:
1) Prices for Providers
The fact that most Americans receive health insurance from their employees or from the U.S. government (Medicaid and Medicare) gives space for providers to raise prices without the final consumer noticing a direct impact when receiving care. Thus, there is little pressure from the consumer side on choosing the less expensive care provider. There are no legitimate prices for care in the U.S. and many providers developed very strong and prestigious brands, which gives them even more power in determining their own prices. A 2015 study by HealthAffairs shows that the average markup of for-profit hospitals in the U.S. was of 1000%. In most states, there is simply no legal limit to what hospitals are allowed to charge.
2) Prices for Manufacturers
As opposed to what happens in many European countries like France, Portugal or the United Kingdom, the US government does not negotiate prices with drug manufacturers, thus allowing them to maintain high margins on their products and increasing the cost of treatment for insurance companies. This is allthemore impactful regarding chronic patients that represent 83% of the total healthcare spent in the US and for which treatments tend to be more expensive. Acording to a study by Carleton University and Public Citizen, if the federal government negotiates with drug manufacturers, the Medicare program could save up to $16 billion annually, from the $70 billion currently spent on prescription drugs.
3) Administrative Costs
In the U.S., there is not one single payer or a centralized payment model. There is a diversity of payment options and insurance plans and companies in competition with each other. This results in more bureaucratic complexity which drives the costs of care up. According to a HealthAffairs study, about 25% of healthcare expenses in the U.S. are actually not medical, meaning they are attributed to administrative processes. Many of these costs actually include investment in marketing efforts which has been intensified with increasing competition between providers and big health systems can spend up to $5.8 million annually in marketing campaigns, according to Society for Healthcare Strategy and Market Development.
4) Defensive medicine
Defensive medicine is the act of recommending tests, treatments and interventions that are necessarily needed but serve to protect the doctor from being held responsible for any health complication that could be associated with wrong diagnosis or malpractice. Physicians from different specialities are also frequently involved in the decision-making processes regarding patient’s treatment, even when this isn’t considered a necessity. All these tests and interventions naturally increase the cost of care and a Gallup report estimates that defensive medicine is currently costing $650 billion every year to the U.S. healthcare system, which represents 26% of the overall spending.
5) Procedure-based payments
Even if the Affordable Care Act is transforming the payment models, many of these are still based on procedures rather than value or efficiency. Thus, there is no stimulus for providers to limit the number of tests, therapies or interventions, on the contrary. More services naturally incur larger costs for insurance companies that end up by increasing the prices for insurance plans. Naturally, the final consumer ends up being penalized by procedure-based payments: according to the International Federation of Health Plans, the average routine visit to the doctor in the U.S. is three to six times more expensive than in other developed countries.
The cost of care in the U.S. doesn’t seem to be slowing down and experts predict it will keep on increasing in the next decade, even if at a slower rate. But there are several factors and initiatives that are contributing to transforming healthcare into a more cost-efficient sector and to reduce avoidable spending for hospitals, insurance companies and patients themselves. Technological innovation is driving this transformation as entrepreneurs identify the need for more sustainability as an opportunity. These solutions may include remote monitoring, telemedicine, self-diagnosis tools, medication adherence solutions among other innovations that are improving the overall quality of care and patient experience, while having a strong potential to reduce costs. The U.S. government is also trying to counter this problem and the 2010 Affordable Care Act is proof of that, by setting value-based payments and patient-centered solutions. Will this multiple efforts be enough to drive costs down? If it is probably too soon to tell, the role of patients and physicians in adopting new solutions remains the center of all solutions.
