Why is the American Health Care System So Expensive?

One of the biggest problems plaguing our economy is the high price of health care. Not only do the costs directly affect consumers, but because of the cost to employers, it also makes the cost of everything else go up. It’s not this way everywhere. Americans pay far more than citizens in other countries. According to Ezra Klein’s post on the Washington Post’s wonkblog in 2010, health care accounted for 17.6 percent of the U.S. GDP compared to an average of 9.5 percent for the 34 OECD countries.

Why is this? Are Americans sicker? Do we go to the doctor more often? According to a 2003 study published in Health Affairs, it’s nothing as complicated at that. As the title of the study reveals, “It’s the Prices, Stupid.” Health care spending per capita in the U.S., at the time of the study, was 44 percent higher than the next-highest country, Switzerland.

Last month, the International Federation of Health Plans (IFHP) issued a new report that examined over 100 insurers in 25 countries, looking at prices paid for 23 different medical services ranging from a coronary bypass to a dose of Lipitor. In 22 of those, the U.S. showed the highest costs. The exception was cataract surgery, where U.S. was #2, just behind Switzerland.

The table below shows a few of the results, comparing the U.S. with other countries.

Service	US	OECD Average
Angiogram	$          914	$           209
Routine Office Visit	$            95	$             24
Bypass Surgery Hospital & Physician	$     73,420	$      21,418
Hip replacement	$     40,364	$      12,569
Normal Delivery	$       9,775	$        3,060
Hospital cost per day	$       4,287	$           821
Prescription drug: Lipitor	$          100	$             31
MRI	$       1,121	$           492

 

Sadly, despite all this spending, we are not getting better quality care. According to the World Health Organization (WHO) in a study conducted in 2000 that looked at health, responsiveness and financial fairness, the U.S. ranked 38^th overall. France and Italy were ranked number one and two. Another study performed by the Commonwealth Fund ranked seven countries based quality, efficiency, access, equity and healthy lives. Netherlands and the UK ranked first and second. The U.S. ranking was at the bottom in 7 out of 13 categories, and dead last overall. Our price per capita is 87 percent higher than the second highest, which was Canada.

There are exceptions within the US. Specifically Medicare and Medicaid, the two programs that are overseen by the federal government, are far more economical than their commercial counterparts. This appears to run counter to the popular Republican line about bloated government bureaucracy not being able to compete with efficiently run private enterprise.

It would appear that to our private health care companies, there is no shame in charging frightened, desperate customers whatever they can get away with, as there apparently is elsewhere. It seems that “health is a business in the United States in quite a different way than it is elsewhere,” says Tom Sackville, director of the IFHP. “It’s very much something people make money out of. There isn’t too much embarrassment about that compared to Europe and elsewhere.” Sackville formerly served in Margaret Thatcher’s government.

Apparently, it’s the role of government in the health care system that appears to a major differentiator. The U.S. is the only place where the prices are set by the open markets.

According to Gerard Anderson, one of the authors of the 2003 study, “Other countries negotiate very aggressively with the providers and set rates that are much lower than we do. They do this in one of two ways. In countries such as Canada and Britain, prices are set by the government. In others, such as Germany and Japan, they’re set by providers and insurers sitting in a room and coming to an agreement, with the government stepping in to set prices if they fail.”

Some, like Sackville, argue that the lower prices overseas are forcing Americans to pick up the tab for innovations like new drugs and equipment. “We end up with the benefits of your investment,” he said.

But, as Anderson points out, drug-makers only spend 12 percent of their revenues on R&D.

It’s not all bad news, of course. American health care ranks high in cancer care, wait times, and access to new technologies for affluent and insured families. The U.S. also has the highest share of adults (90 percent) who report being in good health, compared to 69 percent for the OECD.

In T.R. Reid’s book, The Healing of America, he describes the two major reasons why the American health care system is so expensive. First, the government doesn’t manage prices and second, the complexity of the for-profit system adds significantly to its cost. For every dollar spent, twenty cents goes into administration, marketing, underwriting and profit.

Part of the complexity and cost lies in pharmaceutical patents. Some countries, like India, do not recognize many U.S. drug patents, which means that manufacturers can’t stop lower-cost generic versions from coming onto the market as soon as they are developed. Drug-makers argue that this is unfair in that it puts the burden of paying the R&D costs onto others. But those countries that allow the higher-price patented drugs to be sold exclusively until the patent expires, face a different challenge. This issue takes on poignant dimensions when life-saving cancer drugs are concerned. For example, 90 percent of children with leukemia in developed countries will be cured, but only 10 percent of children in developing countries will survive the disease. The same is true of cervical cancer. It is largely preventable in the U.S. with the HPV vaccine, while it is the leading case of cancer death among women in sub-Saharan Africa.

India and China are seeing cancer rates rising quickly as they industrialize. Allowing local producers to ignore U.S. patents not only helps keep costs, which the government largely bears, down, but it also encourages the development of domestic production capability. These countries, who are expecting to see their pharmaceutical expenditure double in just four years, don’t see where they have a choice. This is why Gleevec, the leukemia drug which costs $70,000 per year in the U.S., costs only $2500 per year in India. These measures, while understandable, also contribute to higher drug prices back home.

This particular fight will likely go on for a while. Perhaps the only way out will be through further innovation of the type that helps reduce the cost of bringing a new drug to market.

RP Siegel, PE, is an inventor, consultant and author. He co-wrote the eco-thriller Vapor Trails, the first in a series covering the human side of various sustainability issues including energy, food, and water in an exciting and entertaining format. Now available on Kindle.

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