US

Why is American healthcare so expensive?

With over 200,000 deaths in the USA at the time of writing, the COVID-19 pandemic has highlighted one of the nation’s most pressing and long-standing issues. American healthcare ranks as one of the worst in the developed world, despite the fact that the US has the highest national GDP. What factors could have caused this?

We shall begin by justifying the premise that American healthcare is actually expensive. Americans spend significantly more on pharmaceuticals than citizens of other countries. A study taken in 2018 found that pharmaceutical spending per capita in the US was $1220, compared to $469 in the UK, or $673 in Australia, for instance; in some cases, Americans pay up to 67 times as much for the same drug than people in other countries (see Figure 1). Not only this, but surgeries are also outrageously more expensive; a heart valve replacement costs Americans an average of $170,000, whereas in Poland, the procedure costs less than $19,000, or $23,000 in Spain.

One of the reasons for this is the lack of government intervention in the healthcare industry. In the US, government health insurance takes the form of Medicare and Medicaid, in which around 68 million are enrolled. These individuals can access treatment, often at the same hospital, for the same procedure, at much lower prices than those not insured by the government. This is reinforced by the fact that ‘Medicare spending rose by an average of 4.3 percent each year between 1997 and 2009, while private insurance premiums grew at a rate of 6.5 percent per year’ (Archer, 2011).The US has long trusted the private sector to achieve the results that the government could not. Some argue that the government is inefficient, or even corrupt, but the private sector is motivated by profit, therefore must be more effective. However, this theory does not apply to the US healthcare industry (see Figure 2), because the private sector does not have as much bargaining power as the government and thus spends significantly more than necessary. When compared to other countries, it is clear that government spending is not the issue; rather, it is the private health insurance companies that allow pharmaceutical companies and for-profit hospitals to drive their prices up. ‘Bargaining power’ refers to the ability of insurance companies to negotiate with hospitals and pharmaceutical companies for lower prices for their customers. Take Medicare: if the government demands that a certain hospital lowers its treatment cost for a certain procedure, that hospital will be more likely to acquiesce than if a private health insurance company was the negotiator. This is because government insurance covers so many more clients than individual private insurance companies, so the hospital would lose significantly more customers if it refused to cooperate with the government. For those with no health insurance, this effect is magnified, because there would be nobody at all to negotiate on their behalf: most hospitals charge, on average, four times more for those uninsured than those on Medicare for an ER visit . Even Karen Ignagni, head of the insurance industry’s trade association, admitted that ‘private plans cannot bargain down provider costs and has asked Washington to intervene’ (Archer, 2011).

A more specific reason, also related to government intervention, is the presence of drug monopolies. In many countries, governments generally allow ‘time-limited monopolies’, in the form of patents, to encourage innovation. However, the US government is the only government which does not set price limits on these drugs. For example, in 2018, three drug companies made a combined $14.8 billion profit by controlling 90% of the insulin market, which allows them to push prices up year by year. One might therefore question why the American government continues to allow this. The same response is always provided, namely that companies need the money to further research. This view is not only held, unsurprisingly, by the biggest pharmaceutical companies, but also by President Trump, in line with his ‘America First’ narrative. However, the validity of this argument is questionable, because, for instance, the patent of insulin was sold for just $1, yet, as aforementioned, the price of the drug itself in the US continues to rise dramatically.  

Another fundamental, but often overlooked reason for the high cost of healthcare in the USA is that healthcare workers are paid more. For example, general physicians in the US made an average of $218,173 in 2016, but in Sweden, the figure was $86,607, or $154,126 in Germany. Americans are not only paying their doctors more, though; administrative workers are also paid higher. Administrative costs accounted for around 8% of US national health expenditure in 2016, but only accounted for 1-3% in other countries . This, clearly, results in higher prices for all medical services, from drug prescriptions to surgeries. However, interestingly, the quality of healthcare in the USA ranked last among 11 industrialised countries, calling into question the legitimacy of the higher prices.

Overall, it is clear that American healthcare is expensive, mostly due to its reliance on the private sector. In the long term, the US would benefit significantly from reconsidering their entire healthcare system, which, indeed, is something President Obama tried to do. Having experienced the COVID pandemic, perhaps this change will accelerate in the coming years.

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