8 Thoughts on Why U.S. Healthcare Costs Are Rising

June 8, 2020

The U.S. continues to spend more on healthcare than any other developed nation. In 2016, the U.S. spent 17.8 percent of its gross domestic product on healthcare, while the average spending level among all high-income countries was 11.5 percent of GDP — begging the question, what is driving costs so high in the U.S.?

As a study by the Health Care Cost Institute suggests, it isn’t because Americans need more care than residents of other countries — it is a series of factors working together to create a perfect storm to drive costs up. This article serves as a breakdown of several reasons these costs are so high.

1. The U.S. fares worse on most major measures of health. Although the U.S. spends the most on healthcare, it doesn’t have better health outcomes. According to data from the World Economic Forum, the U.S. ranks No. 37 in life expectancy, far behind other members of the Organization for Economic Cooperation and Development, including Spain, Switzerland and the United Kingdom, which rank No. 4, No. 6 and No. 20, respectively. In addition, according to OECD data analyzed by The Wall Street JournalAmericans die from cancer, diabetes and coronary heart disease at higher rates than economically similar peers.

These poor health metrics set up an environment conducive to this perfect storm.

2. Costs of services are rising in the U.S. In its “2016 Health Care Cost and Utilization Report,” published January 2018, the Health Care Cost Institute found that every type of inpatient admission experienced a double-digit price increase from 2012 to 2016, causing inpatient spending to rise by 8 percent over the five-year study period. The prices increased even as admission rates fell by 12.9 percent during the same period.

Outpatient spending has also gone up. The price of an emergency room visit increased 31 percent over the five-year study period, and prices for outpatient surgery grew by 19 percent over the same period.

It also remains important to note that the U.S. charges more than other countries for various services. For example, the average cost in the U.S. for a coronary artery bypass surgery was $78,318 in 2014, compared to $24,059 in the U.K. and $34,224 in Switzerland, according to data analyzed by the Kaiser Family Foundation in its “2015 cost comparison report.” In addition, the Kaiser Family Foundation found the cost for an MRI in the U.S. was $1,119 in 2014, compared to $788 in the U.K. and $503 in Switzerland.

3. Salaries. The U.S. pays its physicians, specialists and nurses significantly more than other countries do, which contributes to the heightened costs for medical procedures.

According to the report “Health Care Spending in the United States and Other High-Income Countries,” published in JAMA, general physicians in America made an average of $218,173 in 2016, which was double the average salary of general physicians in most other countries. Pay ranged from an average of $86,607 in Sweden to an average of $154,126 in Germany.

In addition, the prevalence of fee-for-service payment systems in the U.S. creates the incentive for physicians to provide more services. Many providers in the U.S., despite the industry shift to value-based care, still have relative value unit-based compensation contracts, which reward them for seeing more patients, giving more tests and ordering more procedures.

4. Astonishingly high administrative costs. Administrative costs play a large role in healthcare financing. While these costs may be less obvious than patient care-related expenses, they are high — especially in the U.S. A widely cited study published in The New England Journal of Medicine examined data from 1999 to calculate the administrative share of healthcare spending, which accounted for 31 percent of healthcare spending in the U.S., compared with 16.7 percent of healthcare spending in Canada.

A more recent study published in Health Affairs examined data from 2010 and 2011 to determine how administrative costs of U.S. hospitals compared to hospital administrative costs in Canada, England, Scotland, Wales, France, Germany and the Netherlands. It found that 25.3 percent of total U.S. hospital expenditures went toward administrative costs.

5. A lack of price transparency. “A big part of the problem in analyzing health spending is the opacity of the industry,” a WSJ article analyzing U.S. healthcare spending states. And it couldn’t be truer.

Few healthcare players, including physicians, patients and insurers, know the true costs of what they are buying and selling.

According to a recent study from The Dartmouth Institute for Health Policy and Clinical Practice, more than a third of physicians don’t know how much tests and procedures cost, and about 1 in 3 physicians say they do not consider costs while making medical decisions.

Further, since insurers negotiate reimbursement rates directly with providers, it is hard for the patient to compare healthcare costs and make informed decisions about their care.

This is true for the prescription drug market as well. Middlemen known as pharmacy benefit managers negotiate confidential discounts and rebates directly with drugmakers. This process removes the consumer and the government from the equation.

Complicating price transparency efforts further are gag clauses, which insurers and PBMs often write into their contracts. These clauses prohibit pharmacists from telling consumers when they could save money by paying for prescriptions with cash rather than using their insurance.

While there are bills in the Senate looking to ban these clauses, for now, they exist and they are keeping consumers in the dark about their healthcare spending.

6. Prescription drug costs. The U.S. spends more per capita on prescription drugs than its comparatively wealthy peers, according to a report by The Commonwealth Fund.

“By 2015, U.S. spending on pharmaceuticals exceeded $1,000 per person and was 30 percent to 190 percent higher than in the other nine countries,” the report states.

Further supporting the claim is a recent analysis conducted by Bloomberg that compared the prices of six top-selling drugs across countries. The analysis suggests that, even after adjusting for the confidential rebates, prices for many top-selling drugs are significantly higher in the U.S. than in other countries.

One commonly cited example is AbbVie’s drug Humira, a rheumatoid arthritis treatment. In the U.S., a monthly dose costs the most of any country at $2,504.50. In Germany, the second-most expensive place to get Humira, a monthly dose costs $1,749.26. There are hundreds more examples of this trend: Drugmakers charge higher prices in the U.S. than in other countries.

A prime example of the severity of this trend was highlighted recently when news broke that a Pennsylvania man treks to Canada every three months to purchase his son’s medication. In Canada it costs $15,000 annually. The U.S. price is $50,000.

7. Consolidating hospital market. As the healthcare industry transitions and faces additional headwinds, hospitals are choosing to consolidate. While this may protect their bottom lines, research shows this consolidation leads to increased healthcare spending.

Hospitals with a monopoly in a geographic area charge 15.3 percent more for procedures than those in markets with four or more competing hospitals, according to a study titled “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” published in the Quarterly Journal of Economics.

“Hospital prices are positively associated with indicators of hospital market power,” the report reads.

8. Healthcare as a cornerstone of the U.S. economy. Healthcare has established itself as a large player in the U.S. economy. In December 2017, the healthcare industry overtook the retail sector as the nation’s largest employer, and the industry has more than doubled its lobbying efforts in the past two decades, according to the WSJ.

Because of the healthcare industry’s growing presence and lobbying spend, powerful constituencies have been established that resist changes to the way the system operates. And without change, the sharp increases in healthcare costs are expected to continue.





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