Why the US Has the Most Expensive (and Least Effective) Healthcare System in the World

US healthcare: No bang for your buck

When it comes to healthcare, price does not correlate with quality. The UK placed first in terms of healthcare in the industrialized world, yet it spends the second lowest amount, just $3,405 per capita.

The US has some of the most exorbitant medical costs in the world and yet some of the least effective care for the general population. In 2014, a report was released comparing the US to 11 other industrialized nations with similar economies and the US ranked near the bottom on all health metrics, even though average health expenditure per capita was $8,508, about double what most other nations were paying. The nation with the second highest expenditure (Norway) was paying $5,669 per capita, while the lowest paying nation (New Zealand) was only paying $3,182 per capita.

The problem of the uninsured

To add to the system’s problems, millions of Americans aren’t covered by any kind of health insurance. The Affordable Care Act (aka ObamaCare) helped cover about 50% of those who were previously uninsured, but because of opposition in Congress it wasn’t quite the step towards universal healthcare it started out to be. Covering the uninsured would help reduce healthcare expenses, because millions of Americans avoid going to the doctor or getting preventative care due to cost. When their untreated medical problems become severe, the resulting ER bills are much more taxing on the system than simple preventative care would be.

However, the problems with the US health industry are deeper and more complex than just covering all uninsured people.

So why is healthcare in the US 1) so expensive and 2) so inefficient compared to other developed countries?

Distorted incentives for doctors

Under the current healthcare system, quantity is rewarded over quality in healthcare. The reimbursement system from insurance companies for doctors favors tests and procedures, especially those done by specialists, rather than low-cost practices like prevention, basic care, and counseling. US doctors themselves admit that many procedures and prescriptions, perhaps as much as 50%, are unnecessary. This inflates the costs of healthcare when a simpler solution may have helped the patient at a much lower price.

Navigating administrative hell

There are hundreds of health insurance plans, each of which charge wildly different prices for surgeries and scans. This results in high administrative costs as for every doctor there are 6 clinical workers (nurses, aides, etc,) but as many as 10 administrative workers in our system. As long as the healthcare system is so fragmented instead of universal, job growth in the medical field will continue its current trend in which 95% of new hires are administrative staff.

“Chargemaster” accounting

In most businesses, the price of goods and services is determined by adding a reasonable profit to the raw cost of materials, production, and other overhead expenses. Hospitals, on the other hand, determine final prices (the “chargemaster” price) using secretive processes that have no correlation to the actual price of an operation, and this means most patients are being charged thousands of dollars above what a procedure actually costs. This is why among hospitals all over the country, the price of the same operation can vary by as much as $50,000.

“For-profit” thinking in healthcare results in a market failure

The Affordable Care Act eliminated the right of for-profit insurance companies to deny coverage to those with pre-existing conditions. This is a step in the right direction, as in order to maximize profits insurance companies would focus mostly on insuring the healthy, avoiding the sick, and trying to get out of paying for hospital bills if the healthy people became sick. However, more regulation and less of a “for-profit” mentality must be applied to hospitals and pharmaceutical companies as well.

For capitalism to work effectively the consumer must theoretically have the time and resources to weigh his options and ultimately deny the product or service if he feels none of the options are adequate. This encourages competition, and therefore, improvement and lower prices among rival companies. Medical patients who are in intense pain, have a chronic condition that must be treated, or whose life is in danger have none of those options, so they will reluctantly accept whatever price is given to them for pills or hospitalizations. Someone in the middle of a heart attack isn’t going to stop to check if a certain ER doctor is out of network, or if the hospital one state over is offering lower prices.

Finally, the lack of transparency with most hospital prices means the patient is unable to get the information necessary to make a good decision even in non-urgent circumstances. Overall, making healthcare reliant on the private sector leads to problems, waste, and ineffective care, or in other words, a market failure.

Pharmaceuticals and “Pharma Bro”

You’ve most likely heard of Martin Shkreli, aka “Pharma Bro.” He instantly became one of the most hated people on the Internet when, as the CEO of Turing Pharmaceuticals, he increased the price of the life-saving drug Daraprim by over 4,000%.

The thing is, the world has its fair share of greedy, jackass “bros” like Martin Shkreli. The concern should be less with Shkreli’s action (although that was despicable in itself), but more with the fact that our current healthcare system is set up in a way where a CEO can, on a whim, price a life-saving drug out of the hands of people who need it.

Shkreli may be the most visible example of unsubstantiated price hikes, but pharmaceutical companies have been pricing medicine out of the hands of people who need it for years, just not to Shkreli’s egregious extent. According to Bloomberg Business “mainstream pharmaceutical makers routinely raise prices 10% or more a year, much faster than inflation, for drugs aimed at cancer, diabetes, MS and high cholesterol”.

Since drug manufacturers have the highest profits in the industry (20.8% vs. 3.2% for health insurance companies), their practices are worth looking at when it comes to inflations in healthcare costs.

Having an entity with enough bargaining power to negotiate lower prices, like the government would have with a single-payer insurance system, would help avoid future situations like this.

Overall, the future is looking somewhat brighter for US healthcare. The passage and success of the Affordable Care Act, despite its problems, shows a trend towards insuring more Americans, regulating the healthcare industry, and increasing the effectiveness, rather than profits, of healthcare.