Healthcare costs have increased at rates well ahead of inflation for decades. According to the US Centers for Medicare and Medicaid Services (CMS), US healthcare spending as a percentage of GDP grew from 5.6% in 1965 to 17.7% in 2018. Research from The Commonwealth Fund indicates that, in 2016-17, 23.6 million Americans with employer-provided insurance spent at least 10% of their income on either their share of the insurance premium or out-of-pocket costs. The Commonwealth Fund defines this as a high contribution relative to income.
Furthermore, spending in the US is well out of step with other wealthy countries. The US spent $10,966 per person on healthcare in 2019, nearly double the median of other high-income countries. Switzerland, the country that is second on the list, spends around $7,500.
Yet, despite the higher spending, health outcomes in the US are worse than outcomes in these other countries. To name a few examples, the US has the highest infant mortality rate of any high-income country and ranks poorly on premature birth rates and the proportion of children who live to age 5, according to the US National Research Council. Life expectancy is nearly three years lower than the average of other comparable countries, and has actually declined in recent years.
A study by the Commonwealth Fund ranked the US system 11th of 11 high-income countries in overall healthcare system performance (compared with countries such as Australia, Canada, France, Germany, and Norway).
With no end in sight to the rise of healthcare costs, there is a fear that healthcare could become even more unaffordable. What is driving these costs?
High administrative costs
The US spends 8% of total national health expenditures on administration, compared with an average of 3% among all high-income countries, as measured by the Commonwealth Fund.
Researchers lay the difference largely at the feet of a cumbersome private insurance industry. Contrary to common belief that the private sector is more efficient than the government, these administrative costs do not occur with the federal government’s Medicare program. Studies that peg private insurance administrative costs at up to 17% find that Medicare’s administrative costs are only 2%.
High administrative costs related to the private insurance industry stem from overhead costs, including sales, marketing, billing, and advertising, and providers’ costs for claims submissions, claims reconciliation, and payment processing.
Annual per-capita, or per person, spending on drugs is $1,443 in the US, compared with a range from $466 to $939 in similar countries.
One factor contributing to this difference is that pharmaceutical companies regularly charge much more for the same drugs in the US than they do in other countries. Other countries do not allow pharmaceutical companies to set their own prices, using a variety of approaches to control them.
In the US, companies are generally free to charge what they will. Insurers often negotiate prices. However, the largest health insurer in America—Medicare—is forbidden by law from negotiating lower drugs prices with pharmaceutical companies.
A free market? In the United States, federal law prohibits the largest health insurer in the country – Medicare – from negotiating with pharmaceutical companies for lower drug prices.
Physicians’ salaries are high in the US. The average salary for an American general practitioner is $218,173, which is nearly twice the average in other wealthy countries. Some specialists earn more than $400,000 and several are near or over the $500,000 threshold. Prior to the pandemic, cash compensation for physicians had increased steadily over the last decade.
There are a number of explanations for why this is the case, including the high cost of medical school and subsequent student debt, and restrictions on the number of people who are accepted into the country’s residency system. Whatever the reason, however, the bottom line remains: High salaries mean high cost of care.
Lack of competition
Healthcare organizations have been swept up in a wave of consolidation in recent years. The merging entities often say that economies of scale will allow lower prices. But there is evidence that a stronger force—a lack of competition—leads to higher prices.
Because they serve so many patients, large-scale healthcare providers are able to dictate what prices they will charge to the insurers. In Southern California, according to a study of its own employees by Kaiser Health News, insurer Cigna paid a large hospital chain, Sutter Health, nearly double what it paid an independent primary-care doctor for the same vaccination.
Lack of Patient Input on Price
Despite the “consumerization” of healthcare and the resulting language asserting that patients are “healthcare consumers”, it’s not you, the patient, that is negotiating the cost of your care. Nor, if your employer is contracting with your insurer, is your employer. Instead, insurers and healthcare providers – primarily large hospital systems and networks of care – are generally the only two constituencies who have a say in pricing, and their incentives are not necessarily aligned with cost control.
According to The Health Care Blog, “[H]ealth insurers … have little to no incentive to hold down the price of care. Rather, they directly benefit when the price of care rises.” That’s because for many health insurers, employer-provided insurance represents a majority of their business, and the insurers earn a set administrative fee regardless of the medical costs incurred.
In 2018, ProPublica and NPR began reporting on the relationship between health insurers and the healthcare industry. What they found was no surprise: pricing for medical procedures is not transparent to patients or their employers who contract with the insurers. And those prices might sometimes be three times what Medicare pays for the same procedures. According to a report in the NPR-ProPublica series, one healthcare provider in New York billed a patient’s insurer the negotiated in-network rate of $70,000 for a partial hip replacement; the insurer paid 90%, or $63,000, and the patient paid the rest. Medicare, on the other hand, had negotiated a rate of just over $20,000 for the same procedure; FAIR Health, a nonprofit committed to increasing transparency in medical pricing, estimated the total in-network price of the surgery at $29,162.
Yet, the patient’s portion of the $70,000 bill was 10%, meaning he had to pay $7,000, not the $2,916 that the FAIR Health estimate would have required.
A look at just one line item in the bill is revealing: the ball joint that was implanted in the patient during the surgery would have cost the provider $1,500. Yet, the provider charged the insurer the in-network rate of $26,068.
An Employer Strikes Back
The ProPublica-NPR series also reported the story of how Montana’s Department of Administration changed the game. As the employer of 30,000 Montanans, the Department did what few other employers have done: it directly entered negotiations with the healthcare providers in the state and set ground rules for using reference-based pricing that would determine which providers the state’s benefit plan – covering 30,000 “healthcare consumers” – would include.
An independent analysis estimates the state has saved $47 million in its first two years since making the transition to reference-based pricing, a method that limits pricing to an agreed-upon multiple of the Medicare price schedule. Montana currently pays between 220% and 250% of Medicare rates, whereas it previously paid as much as 611%.