Why is health care so expensive?
Why can’t we get a grip on the rising cost of health care?
It’s not for lack of trying. In fact, sometimes it’s because of the trying.
Since the 1970s, when health care spending began accelerating, legislators and policy wonks have been trying to address the steady growth of costs and spending. Unfortunately, some of their best efforts can be filed in the “beware of unintended consequences” category.
For instance, in the 1970s a series of government actions changed the way insurance companies paid for health care. Prior to that, most policies in this country were indemnity insurance. Providers billed patients directly; patients paid providers and then submitted a claim for reimbursement to their insurer. Insurer reimbursements were based on a fee schedule, not a percent of billed charges.
New insurance model, higher spending
But beginning in the mid-70s insurance changed to the HMO model. Providers started contracting with insurance plans and billing them directly. The plans in turn paid the providers a negotiated fee or percent of billed charges, and informed both the patient and the provider how much the patient owed. Price inflation triggered by the move to managed care could ironically be a major reason why prices for health care in the United States are so much higher than in other developed countries.
The switch to the HMO model inadvertently encouraged a number of inflationary changes in the behavior of providers and patients. To offset the effect of health insurance discounts, providers increased their billed charges. Patients, no longer on the hook to pay the full bill up front, increased their consumption of health care services.
Unbundling services leads to more expense
Providers also looked for new sources of revenue. Instead of bundling services together and charging one price for the full visit or treatment, they found ways to unbundle those services and assign a price for each individual act of care. Emergency rooms as a matter of course attach a pulse oximeter to many incoming patients. A pulse oximeter is a device that measures blood oxygen levels through the skin. You clip it on the patient’s finger, and numbers start popping up on a screen.
Originally, that was considered part of the bundle of services that would be billed to insurance plans under one Emergency Room (EMN) code. Unbundling meant generating a separate code for the service of clipping that device to a patient's finger—and for virtually everything else that happens in the hospital. In each new code there was room for price padding, leading to an increase of base prices across the board.
Is it just us? Spending vs. health in America
There are many reasons the U.S. health care is more expensive than that of other wealthy countries. One is cultural—the American family is highly mobile. We tend not to stay where our relatives are. This means, at the end of life, there are fewer multigenerational families capable of taking care of ailing elders. The U.S. spends significantly more health care dollars on end-of-life care than most nations.
Another issue is concentration among large-scale providers. According to a study published in the Journal of the American Medical Association in 2018, “some of the producers in the US medical community are effective monopolists.” That monopoly power means that procedures may cost significantly more in the U.S. than identical procedures performed in other countries.
The study compared U.S. health care spending to that of 11 other wealthy nations. It found that, while outspending those countries considerably—25% higher than Switzerland, the next highest spender—the U.S. had the lowest life expectancy, the highest infant mortality rate and ranked first in percentage of obese adults.
Yet, the mean specialist physician salary in the U.S. was $316,000. In Germany that figure was $118,243. In 2015, the U.S. spent $1,011 per capita on pharmaceuticals. Most other developed countries spent about half that. Administrative costs in the U.S. were at least 5% higher than in any of the other countries. The U.S. has one of the highest usage rates of private health insurance in the world, and the profit margins of those companies adds to overall costs.
Growth in utilization drives increase in cost
It’s hard to talk about the costs of health care without examining utilization—particularly over-utilization. Compared to other countries, Americans overuse health care. Studies show, not surprisingly, that doctor visits are triggering events for health care spending. We go to the doctor expecting something, and generally those expectations are met—a new prescription, a new therapy, a referral to another doctor to get a better look at whatever health issues we have. Sometimes this is exactly what we need, but, compared to other countries, Americans get more healthcare services, and pay a higher price for them, while our health outcomes for all except the elderly are worse.
Doctors are people, just like us. They were raised a certain way, educated a certain way and formed certain perspectives. The way doctors practice varies widely based on these and other factors, like where they live and the demographic of their patient pool. And yet, despite all this variation, we believe that doctors are going to tell us what is best for our health.
So, when a doctor tells us to get a procedure or take a new pill, usually we do. But doctors might have other incentives for telling us what we need. There may be expensive new bills to pay. There are very expensive malpractice suits to avoid. A provider may not be up to date on the latest health literature.
“To say that 30% of health care utilization in this country is unnecessary is a conservative estimate," says Dr. Marcus Thygeson, chief health officer at Surest. "We know it’s unnecessary because when you look around the country, you see practice pattern variations—different utilization patterns depending on where you live. Only a small part of that variability is driven by patient factors. The main drivers are the supply and types of providers in the community. The higher utilization associated with more doctors and hospital beds is often referred to as supply-driven demand.”
Self-driven demand and health care spending
Health care, it turns out, is unique in the world of consumer goods in that the supply side has an enormous ability to drive demand for itself. Here’s how that happens:
Let's say you're a hypothetical 48-year-old woman who is slightly overweight. You have heartburn so you see a gastroenterologist, Doctor A. Doctor A tells you to lose a few pounds, alter your diet, take some antacids after meals. But what if you were originally sent to Doctor B? He sees that you’re over 45, which places you in an age group where stomach cancer is unlikely but possible. She wants to do an expensive procedure, an endoscopy, just in case to make sure you don’t have cancer. Are you going to argue with Doctor B that all you really need is just a roll of Tums and a jogging regimen?
“That decision is almost completely at the whim of your doctor,” says Thygeson. “And it’s supply-driven demand. Physicians have a predilection to treat and we can be quite insistent about it. We don’t want to miss anything, and we’re big believers in medical technologies.”
Lack of information impairs market efficiency
Again, its people trying—maybe just a bit too hard. Statistically the outcomes of those two treatment paths are similar. One is considerably more expensive than the other. Doctors are trying to make sure they catch everything—in part because of malpractice concerns, but also because they can. All of our medical technology sits around failing to cover our investment in it if we’re not actively using it. Why not make sure we’re right with the tools on hand?
The impacts of all these factors on health care costs could be minimized if there were a true health care marketplace. But health care consumers turn over all the decision-making to their doctor, the experts in health matters. We don’t have much information when we need care. We’re not sure about the nature of the problem. We have little idea what treatment options might be. We generally have no idea how much it’s going to cost.
In health care, costs are hidden and outcomes are not well known. Providers haven't traditionally measured outcomes with any consistency. Without tracking outcomes, there’s no sense of the true benefits, or costs, of treatment.
Between the unintended consequences of well-intended policy, a lack of market forces to regulate prices, little standardized accountability for outcomes and supply-driven demand, prices can increase without effective controls—while the actual quality of care trails behind.
Those are some of the reasons health care costs so much.