Healthcare costs in the US are the highest in the world, but what's driving this huge difference in spending?

Prices for US private insurance are significantly higher than those seen under other kinds of health systems, say experts. Americans have spent $3.65 trillion on healthcare in 2018 alone


                            Healthcare costs in the US are the highest in the world, but what's driving this huge difference in spending?
Americans spend about $1,100 for a CT scan while the Dutch shell out $140 for the same. (Getty Images)

Healthcare in the US is ridiculously expensive: Americans spend about $1,100 for a CT scan while the Dutch shell out $140 for the same, according to a report from the Health Care Cost Institute.

Netherlands can boast of having the best healthcare systems in the world, and yet the people spend only a quarter of what American insurers do on hip and knee replacements, adds the report.

The US has the most expensive healthcare system -- hospitals, drugs and doctors. For instance, South Africans pay less than one-fifth of what Americans do to buy Harvoni, one of the new breakthrough treatments that cure hepatitis C. The same applies to other drugs such as Humira, the arthritis drug. The United Arab Emirates spend less than half of what American insurers do on Humira. For Factor VIII, the anti-clotting agent, every single country in the study pays half of the US price or less.

The analysts tried to draw a larger picture of the overall expenditure and they found that Americans have spent $3.65 trillion on healthcare in 2018 alone.

This also means the country is devoting a huge chunk of its GDP into healthcare. In 2016, the US spent 17.8% of its GDP on healthcare, which pales in comparison to the combined average spending of high-income nations. The US spent nearly twice as much as 10 high-income countries on medical care that year, according to a JAMA study.

Why is healthcare so expensive?

The US is a wealthy country, so everything comes at a hefty price: drugs are more expensive; doctors costs a lot; and hospital services and diagnostic tests cost more.

"Prices of labor and goods, including pharmaceuticals and devices, and administrative costs appeared to be the main drivers of the differences in spending," according to a 2018 JAMA study that analyzed healthcare spending in the US.

But majorly, high prices stem from the lack of price regulation, says the recent report on health care services from the Health Care Cost Institute. Private insurances, which cover more than half of Americans, enjoy some amount of leeway. This means they negotiate with private providers and drug companies to set their prices. As a result, prices for US private insurance are significantly higher than those seen under other kinds of health systems. 

While some countries like the UK, the government employs doctors and owns hospitals, others like Australia have a universal public insurance program in place. (Getty Images)

In contrast, other high-income countries have managed to place a cap on their prices, thanks to their governments. While some countries like the UK, the government employs doctors and owns hospitals, others like Australia have a universal public insurance program in place. Even the Netherlands, which has a fully privatized insurance scheme, has placed more government controls on prices than the US, says the report from the Health Care Cost Institute.

Government insurance

As Dr Amit Phull, a medical director and vice president of strategy and insights at Doximity, puts it the American healthcare system is bloating.

Back in the 70s, the US healthcare appeared promising: it was affordable for most people, and was set to provide the best medical care in the world, he wote in the STAT

But as more laws were being introduced, the system required more governance and monitoring from administrative staff to ensure compliance and reimbursement for medical services. This led to an a flux of jobs -- but for administrators. There are now 10 administrators for every one doctor in the US today, according to a Harvard Business Review blog post by Robert Kocher. And 95% of new hires in healthcare are not doctors or nurses, they are administrative hires that have little to do with caring for patients. 

"One can chart the growth in how expensive US health care has become by simply looking at the growth of the ratio of administrators to doctors since the 1970s, " he writes in his opinion that appeared in the STAT.

Then came the Patient Protection and Affordable Care Act (ACA) -- which increased physicians' workloads, making little difference to the patients, he explains.

Further, he adds, while the ACA was successful in increasing insurance coverage, patients had to still rely on the private insurance market to meet additional costs. And when this happens, patients pay huge insurance premiums and higher out-of-pocket deductibles to private insurance markets.

Despite spending the most, the country ranks amongst the lowest among developed nations for healthcare. High costs have been a major barrier: about 44% of people with incomes below the median — about $55,700 in 2015 — have reported that the cost of care prevented them from getting medical treatment they needed. Other shortcomings of the US healthcare system are getting medical bills paid and other administrative hassles.

In an effort to cut down the skyrocketing prices, the Democrats passed a sweeping legislation to lower prescription drug prices, earlier this month. But this has not gone down too well with pharmaceutical companies.  Nearly 150 biotech CEOs warned that the drug pricing bill passed by the House of Representatives on Dec. 12 would destroy their businesses. If the government brings down the prices, companies will spend less money on research and development. The result will be fewer new drugs, according to STAT.

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