Drivers of Healthcare Costs in the U.S.: Fundamentals and Myths

By: Emma J. Fennelly, Spring 2019 HeLP Legal Services Clinic Intern

In the HeLP Clinic, we serve children and their families that live below 200% of the Federal Poverty Line. These families are predominantly insured by Medicaid. However, many Americans with health insurance still experience health-related financial problems. In a 2016 study of medical debt, the Kaiser Family Foundation and The New York Times found that, of those with insurance who reported having trouble paying their medical bills, 63% said they had used up all or most of their savings; 42% had taken on an extra job or extra hours; 14% moved or took on roommates; and 11% turned to charity. The rising cost of healthcare in the U.S. is one of the greatest contributors to financial plight felt by many Americans. A 2016 Gallup poll found that 27% of individuals identified affordability of healthcare the nation’s most urgent problem.

The concerning thing about healthcare costs in the U.S. is that we don’t receive better treatment outcomes or a greater quality of care than other economically developed nations, despite spending significantly more both as a percentage of GDP and per capita. According to data from the Organization for Economic Cooperation and Development, in 2016 the U.S. spent 17.2% of its GDP and $9,829 per capita on healthcare, while the U.K. spent 9.7% of its GDP and $4,192 per capita, and Canada spent 10.6% of its GDP and $4,753 per capita. However, in a healthcare study among 13 high-income countries that investigated a range of factors including life expectancy, infant mortality, chronic health conditions, and obesity rates, the U.S. ranked last in healthcare outcomes. So, what exactly are we paying for? Unfortunately, there are varying drivers contributing to the rapidly increasing costs of healthcare in the U.S., and a quick fix is not on the horizon.

When addressing rising healthcare costs, we must first dispel some of the myths surrounding the issue. Population growth, while contributing to overall spending, does not increase spending per capita, where we significantly outpace other countries. Additionally, the changing nature of disease is not a key driver. While some illnesses are more prevalent, the U.S. has actually taken steps towards prevention and treatment of chronic conditions, cancer, and HIV/AIDS. Even tobacco use has declined among Americans in recent years. We aren’t simply unhealthy. Finally, there is a belief that malpractice and the fear that a doctor or hospital could be sued at any moment make healthcare costs surge. This is not the case either. In fact, malpractice accounts for less than 1% of healthcare costs.

Probably the single most important driver of healthcare costs in America is the price per unit of healthcare consumed. We pay more for procedures just for being in the U.S.  For example, the same 2016 study that observed 13 high-income countries and their healthcare systems found that a CT scan in Australia, costing an individual there on average $500, would cost an individual in New Zealand $731, and an individual in the U.S. $896. Additionally, an appendectomy in the Netherlands would cost you $4,995, while it would cost you $9,845 in Switzerland and $13,910 in the U.S. Finally, a bypass surgery costs $15,742 in the Netherlands, $40,368 in New Zealand, and $75,345 in the U.S.

The reason we pay so much more for the same treatments is attributable to our next largest driver, the structure of our healthcare market. Dominant healthcare providers use and abuse the healthcare market. While the free market is intended to promote competition and control prices, geographic monopolies give large providers complete control over healthcare price. You will find that in one given region, the predominant providers are all part of one overarching system, which can include health insurance providers, hospital care, specialty physician services, and primary care providers. Market concentration and mergers enable these providers to demand higher prices and suppress competition.

Finally, third-party payers and doctors’ incentives often leave healthcare consumers without meaningful choice in their treatment. Under existing models, doctors receive more money for using certain technologies and performing certain procedures than they do for using their cognitive skills and giving advice. Thus, most physicians are financially incentivized to use the latest (and most expensive) technology without much regard as to how much that technology is actually worth. Additionally, third-party payers make patients less likely to have very much regard for the price of their treatment at the point of service. Further, consumers’ lack of medical expertise and knowledge of prices or alternative treatments limit efficiency as well.

In conclusion, these are only some of the drivers contributing to inflated healthcare costs. There is not one simple solution to such a complex problem. However, the resolution of this issue will take a systematic change in the healthcare market. To lower these exponentially increasing costs, our policymakers must promote competition with anti-trust enforcement, preventing huge mergers and healthcare monopolies. Rates must be regulated, perhaps treating providers as government entities and capping prices. From the grassroots level, the patient-doctor relationship needs to be more of a collaborative effort where both parties are informed of all options and their potential outcomes. While there is not one easy solution, there are many steps that could take the U.S. healthcare market in the right direction.