Why Is U.S. Healthcare So Expensive?
How America’s unique approach to healthcare is hurting patients
American healthcare—notorious for its complexity and obscenely high prices. My rude awakening to this reality came in the form of a $200 visit to Urgent Care, where I spent three hours seated on a gurney only to be sent home with a pat on the back and a pack of Strepsils.
It goes without saying, but even if you aren’t in need of life-saving surgery, access to healthcare is critical to maintaining a safe and healthy quality of life. And yet within the U.S., debate continues to swirl around whether healthcare should be treated as a right or a privilege, though one need only look at our nation’s health outcomes to see that our system is more a reflection of the latter.
The Current State of U.S. Healthcare
According to The Commonwealth Fund, the U.S. spends nearly twice as much on healthcare as a share of the economy in comparison to other high-income countries, yet it holds the lowest ranking in life expectancy and leads in chronic disease burden, obesity and suicide rates. In other words, while we spend significantly more on our medical system than our international peers, we rank the poorest on some of the most basic measurements of public health. On top of this, a significant portion of our population struggles with gaining access to health coverage, where in the first six months of 2020, 12.5% of working-age adults were completely without health insurance, and 43% reported having inadequate coverage to help buffer their medical costs.
While a global pandemic certainly didn’t help the state of things, even prior to 2020, the U.S. faced a glaring healthcare affordability and inequity problem. The big question, then, is why? What exactly makes healthcare in America so expensive, and why don’t our higher costs equate to better health outcomes?
Costs are high for a myriad of reasons, but we can largely boil them down to three key factors: complexity, a lack of regulation and our system’s emphasis on high end services.
I. Complexity
To put it simply, complexity within the context of healthcare just means more dollars and more waste. Unfortunately, this complexity is largely a byproduct of our fragmented, multipayer health system as a whole, which has made the most basic of transactions, such as billing and filing insurance claims, complicated and tedious processes.
For instance, consider how there are thousands of companies that make up our private insurance market, each with their own set of benefits and payment plans, and yet there’s no standardized system in place for insurers to communicate with providers about charged services. Instead, claims and reimbursements must undergo a complicated coding process, where every procedure, treatment and diagnosis must be translated into a unique code in order to be filed into billing paperwork. Complex tasks such as these require significant administrative support, which inflate overall costs that trickle back down to patients.
And that’s just for billing and insurance-related items. Any other activities that support running the business side of healthcare, such as scheduling, marketing, enrollment and hiring, are considered administrative tasks and come with their own set of personnel and costs.
The result? An estimated $570 billion wasted due to administrative complexity alone, equating to 15-30% of total U.S. medical spending.
While there’s no doubt that a portion of administrative costs are crucial to driving important, everyday transactions, having a streamlined and integrated system in place for providers and insurers to communicate with one another would undoubtedly help reduce the need for administrative support, minimize waste and lower medical spending.
II. A Lack of Regulation
In 2015, ‘Pharma Bro’ Martin Shkreli, CEO of Turing Pharmaceuticals, found himself in hot water after raising the price of Daraprim—a drug used to treat a life-threatening parasitic infection—from $13.50 to $750 overnight. With little evidence as to what improvements were made to justify such an aggressive price hike, the case was painted as a clear abuse of market power.
While Shkreli’s actions were a blatant example of monopolistic behavior, there are plenty of companies who have followed similar pricing strategies—think Cycloserine for tuberculosis, or Mylan’s EpiPen—all life-saving medications whose historical price gouging tactics left consumers with hefty price tags.
The question then becomes, how are companies able to act this way?
Simply put, it’s because the system largely works in their favor. For one, U.S. drug prices are not regulated by any federal agency, which means costs can be arbitrarily set in response to the market. This is in contrast to most other nations, who exercise some form of price regulation and handle negotiations directly with pharmaceutical companies. Additionally, in the U.S. new medications are granted patent and marketing exclusivity by the government, preventing generic, cheaper competition from entering the market for up to several decades. In circumstances like these, consumers have no choice but to stomach the inflated costs even if it means taking on significant medical debt.
There are, of course, plenty of other factors that go into price hikes for a drug, but the long-tail list of cases where Big Pharma has take advantage of our ‘free market’ approach to pricing highlights a jarring lack of regulation and protection in the industry, where the incentives are simply not in favor for the patient.
And if we’re talking about life-saving medication here, should that really be the case?
III. Our Emphasis on High End Services
A third culprit of our overpriced medical activities is our system’s emphasis on high end care and services.
Robert H. Shmerling of Harvard Health Publishing argues that our system places a unique focus on specialty care, where Americans have been found to use expensive technologies and employ specialized procedures more than our international peers. With this also comes compensation implications, where the folks who work in these high end specialty sectors, such as anesthesiology or cardiology, can earn as much as three times the income of their primary care counterparts.
A large driver of the demand for these services—and an emerging issue within America’s medical community—is the practice of overtreatment. Cases of overtreatment occur when “low-value services”, essentially a clinical service that provides little to no benefit in a given scenario and could even cause the patient harm down-the-line, are pushed upon patients by doctors. Examples of this include MRI scans for back pain, cancer screenings among the elderly or prescribing an unnecessary medication.
While in some of these cases, doctors are simply trying to do their jobs as thoroughly as possible and mitigate the risk of overlooking health issues, this type of care is a significant source of waste within the industry, making up as much as 30% of total healthcare costs. Further, these treatments can also put patients at risk by delaying actual diagnosis of the problem or by making them undergo unnecessary and dangerous procedures.
But back to the initial issue around high end care. Overtreatment feeds into this broader notion that newer, more expensive procedures and medications should be the default, catch-all solutions to our health problems, when in reality, the lesser expensive and more preventative measures, like nutrition, exercise and therapy, are often just as important and effective.
Is Universal Healthcare the Solution?
So we’ve established that healthcare is costly for a variety of reasons, including waste, price gouging and a misdirection of resources, among other things. Unfortunately, none have simple, fix-all solutions, as many of these issues are simply the result of how our system operates as a whole.
Perhaps the most popular proposal to amending healthcare affordability and accessibility is the argument for universal healthcare, where anyone can have access to health insurance whenever needed and without financial constraints under a standardized, government-run program. After all, the U.S. is one of the only developed nations that does not provide a universal healthcare option to its residents. But achieving this type of system is anything but straightforward, with some of the main arguments against this structure primarily being the following
Cost — Achieving a program like this would require a much larger federal budget, which would inevitably mean higher taxes.
Quality — If everyone was covered under the same entity, how would that impact medical research and development within the field? Would there be as much competition or incentive for medical innovation?
Choice (or lack thereof) — Under a universal healthcare program, we would have one, or if not a much more limited array of coverage options to choose from under the government’s package, and some people are perfectly happy with their current policies.
Disruption — Despite facing a worker shortage, our healthcare sector is one of the largest employers, making it an integral part of our economy. Further, with over 90% of our population currently covered under insurance, would completely up-ending the system cause more harm than good?
This of course isn’t a black or white discussion. There are plenty of nations that have managed to provide its residents with an array of coverage options while ensuring everyone has access to insurance. Take Switzerland or France, for example, both nations that have achieved a universal healthcare model while maintaining a private insurance market.
Also worth mentioning is our government’s previous attempts to address our healthcare debacle, the most notable being the Affordable Care Act (otherwise known as Obamacare) introduced in 2010. Under this plan, efforts to make healthcare more accessible and affordable were made through introducing things like government subsidies, mandating new provisions for insurance companies and expanding Medicaid. While the ACA did in fact increase the number of individuals insured and is available to this day, even those who do have coverage are still struggling to keep up with the rising prices of medication and services.
The Shift to Value-Based Care
One medium term means for reducing healthcare costs is changing the way in which providers are rewarded for their services, and it’s a movement that has been gaining significant momentum as of late; specifically, there’s been a notable shift away from a fee-for-service care model (FFS) and towards a value-based care model (VBC).
In a VBC model, providers are rewarded based on the outcomes of their services, thereby incentivizing the delivery of more effective and higher quality care for patients. This is in contrast to the FFS care model, which pays providers based on the services delivered regardless of care outcome. The former prioritizes the health and well-being of the patient, and the latter the volume in services charged.
A 2020 study by Deloitte found that 97% of physicians still rely on a FFS model, but recent disruptions from the pandemic, where providers were forced to assess COVID treatment efficacy through measurements such as lowering hospitalization and death rates, have been shown to catalyze an increase in application and investment of VBC. And as this approach becomes more popular and forces providers to focus on outcomes over stacking up service charges, we can expect a reduction in things like overtreatment and a lowering of overall costs within the industry.
In Sum, It’s Complicated
41% of working-age Americans continue to battle healthcare affordability via piling medical bills and debt. The Biden Administration, who claims healthcare is a fundamental right, has pledged to tackle this issue with ambitious plans to expand insurance coverage and lower overall costs for residents through building upon the ACA, strengthening Medicare and reforming pharmaceutical pricing, among other things. Between renewed efforts from the White House and the normalization of VBC, it’s possible that change in some form is on the horizon.
But as well-intentioned as these efforts are, it’s difficult to ignore the fact that our healthcare sector has evolved into a formidable, money-making powerhouse operating at an incredibly large scale that, it will be near impossible to implement change of any kind without knowing how effective (or destructive) outcomes will be. After all, many of our system’s aforementioned issues around waste and price regulation stem directly from the structural makeup of our multipayer market, so upending operations could have very negative consequences to insurance payers content with their programs, or happily employed healthcare workers.
Until that change comes, American healthcare remains a cautionary tale for the ethical and equity complications that arise when profits are prioritized in an industry meant to protect people.