Why is US Healthcare so Expensive?
Today, I’d like to talk a little bit about why healthcare is so expensive in the US.
First, some context. “In 2016, the U.S. spent 17.8 percent of its gross domestic product (GDP) on health care, while the average spending level among all high-income countries was 11.5 percent of GDP.” This adds up to over $750 billion in 2009 alone.
This extra spending comes from several sources (see page 13). First is private health insurance administration. As I said in a previous post, single-payer is efficient in large part because it removes these useless bureaucracies. But I think it’s under-appreciated that a large amount of extra spending comes from monopoly power of hospitals. For example, a recent “study found that hospital prices in monopoly markets are fifteen per cent higher than in those with four or more hospitals.” This is where another big chunk of the saving of Medicare-for-All (M4A) comes from: under single payer, the government alone sets prices, a power that can be used to counteract hospital monopoly power. Because hospitals account for 32% of all healthcare spending, that’s a big source of potential savings.
I would prefer markets to not really be involved with healthcare at all: making money off of health rarely ends well. Given that M4A already polls at +7%, progressives should start suggesting even farther left proposals, like VA-for-All. Happy to see AOC bring this up sometimes!
Of course, socializing hospitals is surely not within political reach today. But there are places we can start. See here for an interesting idea to nationalize failing rural hospitals.
Lastly, M4A saves money by being able to basically set prices for drugs. “The U.S. spends $1,443 per person on pharmaceuticals, compared to the average of $749.” And, the profit margins of pharmaceutical manufactures are 26% (!!) compared to the 3% of health insurance companies.
Why so high? Well, “The United States is unique in that we both grant pharmaceutical companies a patent monopoly on their drugs, and then let them sell the drugs for whatever price they want.” M4A tackles one side of the equation. But we should tackle the other side too. While producing drugs is often pretty cheap, the end up costing an exorbitant amount because of government-granted monopolies through patents. Not only that, but competition is wasteful in the medical field. It leads to redundancies, instead of everyone cooperating and sharing research. See here for a proposal that would bring funding of drug research under public control, release new research to the public quickly, and cover discoveries with copyleft-esque patents. I have updated how much this proposal will save from the 2016 numbers in the original post: factoring in the growth of drug prices and using the medium estimate, it would save $352.7 billion in 2020, or $4.4604 trillion from 2020–2029. Using the low estimate, it would save us $301.2 billion in 2020, or $3.8089 trillion from 2020–2029.
Even after all that, we’re spending hundreds of billions more than other countries every year on healthcare. Where is this coming from?
Well one other source is the practice of defensive medicine: “doctors ordering tests or procedures (or avoiding others) primarily because they’re afraid of malpractice liability.” This is clearly a waste, and an incipient study from awhile back puts the cost of it at $53.71 billion a year in 2020 dollars.
In addition, doctors are over paid in the US (probably due in no small part to hospital monopolies). “The average salary for a general practitioner in the U.S. is $218,173, nearly double the average salary across all high-income countries. Specialists and nurses in the U.S. also earn significantly more than elsewhere.” Another source of waste is lack of preventative care, to the tune of $55 billion in 2009 alone. Certainly, if cost wasn’t an issue, there would be better preventative care.
A big obstacle to good M4A implementation will be having a single system to keep track of health records. Currently, fragmentation of care (leading to 25% of patients needing to get repeat tests and many lost records) accounts for tens of billions of dollars of waste annually.
Lastly is the issue of healthcare utilization. On this, I’ve found mixed evidence. The Commonwealth Fund finds that “Except for diagnostic tests, the U.S. uses health care services at rates similar to those of other countries”. But the National Institute of Health finds that over-utilization, and use of unnecessarily costly procedures, costs $210 billion annually. So it’s definitely something to keep an eye on.
