3 Reasons Healthcare Is So Expensive in the USSaving Money
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There’s obviously a lot at stake in the 2020 election, and healthcare is one issue that has fallen under the radar with everything that’s going on in the news cycle. So today I want to talk to you about what’s going on with healthcare in the United States.
Now I know this is a politically charged topic, and if you’ve followed my content you know this isn’t going to be about plugging Biden or Trump. But no matter who you support it’s clear that the US healthcare system has some structural issues.
In this article I’m going to go over three reasons why healthcare in the United States is so expensive, and along with each reason I will be considering possible solutions. And if you read the article and you enjoy it or find it interesting, or even if you hate it, I would appreciate it if you shared your thoughts with me and other readers in the comments.
What’s going on with American healthcare?
OK first things first, I want to talk about the data. There have been a lot of studies on this topic, but one that stands out to me is a report from a team led by a researcher from the Johns Hopkins Bloomberg School of Public Health. And basically they compared what Americans pay for healthcare to what people are paying in other OECD countries.
Don’t want to read? Watch the video here!
Healthcare costs in the US vs. the OECD
If you’re not familiar with the OECD, it stands for Organization for Economic Co-operation and Development, and it represents a group of high-income countries from around the world. Here’s the list of current members:
- Czech Republic
Essentially the point of this study was to contrast the United States with other countries in similar economic situations. Of course our healthcare spending per capita is likely to be higher than healthcare spending in countries with lower GDP per capita, so it makes more sense to compare apples to apples rather than just comparing absolute values.
And according to this report the US spent nine thousand eight hundred and ninety-two dollars per person on healthcare in twenty-sixteen, which was the most recent year I was able to find data, so it could be even higher by now.
Not only was that the most spending of any country in the OECD, it was the most by a really wide margin — Switzerland was second, and they spent just seven thousand nine hundred and nineteen dollars per capita. So that means we spend almost twenty-five percent more on healthcare than the country with the second-highest level of spending. When you compare us with countries that were closer to the average, Canada for example, our expenses are actually more than double what theirs are.
When did healthcare get so expensive?
So it’s clear that this is a problem, but what’s interesting here is that it’s actually kind of a new problem. The researchers point out that American healthcare spending per capita more than doubled in the sixteen years going from two thousand to two thousand sixteen.
If you adjust for inflation it works out to less than double, but still something like fifty-six percent which is a massive increase in just sixteen years. So it’s not like this is an issue that goes back generations or something like that, a lot of it has come up more recently.
Are we really paying more for better care?
Now on the other hand, you might think that we pay more because we get better coverage, but it’s really unclear whether that’s actually the case.
In fact, almost ten percent of the American population doesn’t have health insurance at all. That’s a lot better than it was before the Affordable Care Act or Obamacare was passed in twenty-ten, so we’re making progress. On the other hand, we still have a much larger uninsured population than many other developed countries, some of which have universal insurance programs that cover every single citizen.
OK that should give you an idea of what our health insurance looks like relative to other countries in similar economic situations, but it’s hard to pin that trend to any particular cause, so in this article I’m going to share with you three primary reasons.
1. We pay more for the same drugs
Regardless of your political views, you’ve probably heard about the problem of drug prices in the United States, and this is definitely one of the most relevant factors.
This comes up a lot with insulin, and the data indicates that Americans spend much more than Canadians for what comes down to the same product. One study found that American insulin went from forty dollars per vial to one hundred and thirty dollars from two thousand two to two thousand thirteen, and another found that the average annual cost of insulin increased from twenty-nine hundred dollars to fifty-seven hundred dollars over just four years from two thousand twelve to two thousand sixteen. So in the equivalent of one presidential term, basically Obama’s second term, insulin almost doubled in price, and even before that it was already more expensive than in many other countries.
Going to Canada just for Insulin?
Now another problem that this point leads to is the fact that people don’t have an infinite amount of money. So if your insulin costs thousands of dollars every year you might be put in a situation where you have to choose between treating your condition and covering other critical expenses. And in fact Yale researchers found that roughly one quarter of American diabetic patients report using less insulin than recommended because of issues with the cost. Some patients have even crossed the border into Canada where they can get the same treatment for as little as one tenth of what they would pay in the United States.
Of course insulin is a high-profile drug here, but it’s far from being the only prescription that Americans pay too much for. In September two thousand nineteen, the House of Representatives Ways and Means Committee released a report detailing price discrepancies between the United States and eleven other places: the United Kingdom, Switzerland, Ontario, Japan, Denmark, Australia, Portugal, the Netherlands, France, Germany, and Sweden. For a total of seventy-nine common drugs, Americans pay an average of nearly four times more money than citizens of these other countries. So this isn’t the only reason our healthcare costs are inflated, but obviously it’s a problem when you spend four dollars for every one dollar that’s spent in another country.
2. Americans avoid healthcare due to cost
As I mentioned in the Yale study, about one-fourth of Americans with diabetes have used less insulin than they need because they’re worried about the cost. Obviously that’s a sign of how expensive the drug is, but it also means that some of those people will end up in the hospital for more serious conditions because they weren’t able to stay on the treatment regimen they needed. This is actually a common trend in the American healthcare system, people will avoid getting help when they need it, and what happens is they don’t go to the hospital until things get really bad and they need more invasive treatment.
How many people avoid care?
One report that I’ve seen claimed that thirty-two percent of American families, so almost one third, decided not to get medical care at some point from March twenty-nineteen to March twenty-twenty because they were concerned about the cost. And sure they avoid the cost at that point, maybe they don’t have to worry about the co-pay, but what ends up happening is that their condition gets worse and they need to spend even more when it finally forces them to get help.
How important is preventive care?
Another study from the National Institutes of Health discussed the importance of preventive care and claimed that “the focus on prevention and wellness and the additional time, attention, and access to physicians (ie, higher quality of care delivery) will lead to better health status, lower emergency room (ER) visits and hospital utilization, and ultimately lower health care expenditures.” They recommended a few things that could fix the problem including a higher ratio of doctors to patients, longer visits with a personal physician, and proactive health coaching outside of appointments.
Doesn’t preventive care make healthcare more expensive?
What’s interesting about this study is that when they put these ideas into practice, they found that costs went up dramatically in the first year, but by the third year they had already dropped to essentially the original level. And this is the problem with systems that focus on short-term profits.
Of course it seems like you’re being more efficient by having doctors see as many patients as possible for relatively short appointments. But the result of this kind of strategy is that people will be disengaged from their own health and develop more serious problems over time. So if we could revamp healthcare to give people better access, even though it sounds like things would get more expensive, that might only be a short-term issue that goes away once people start to see the benefits of preventive care.
3. Administrative costs
Hopefully that clarifies how much of our healthcare costs stem from higher drug prices and less preventive treatment, but those don’t explain the gap on their own. Another factor that plays a really crucial role here is the difference in administrative expenses between the United States and other developed countries. If you’ve ever had to seek medical care in the U.S. you know it can get complicated quickly, especially when your insurance company may go to great lengths to avoid paying for something you thought was covered.
Of course there are a number of reasons for this issue, but the most obvious one is how hopelessly fragmented our healthcare system is. Some people have private insurance through their employers, some people pay for insurance directly, some people are on Medicare or Medicaid, some people are on the Indian Health Service, some people have public insurance through the Affordable Care Act, and so on.
Each of these providers has their own protocols, their own coverage, their own rules, which makes the world of healthcare extremely difficult for the average person to navigate. And on top of that each separate provider needs administrators to interface with other providers.
US healthcare spending priorities
This trend is really clear in the graphs below, they’re from the Peter G. Peterson Foundation, and they found that the United States spends more than five times as much on administration than the average developed country, and on the other hand we spend a little more than one half of the average on long-term care. So as I mentioned earlier this is money that could be going to improve preventive care or to improve access but is instead funding our massive administrative system.
Are single-payer systems more efficient?
And this is another one of the main arguments for single-payer healthcare through Medicare for All or something like that. Of course it sounds like giving everyone health insurance will be really expensive, and as I discussed earlier in the article it’s true that providing better care could lead to higher short-term costs.
But switching to a simpler system could also save us hundreds of dollars per capita on healthcare administration, and if we put those savings toward more effective care then we could save money on the other end by improving outcomes. So even though you’ll hear that private healthcare is more efficient or that we can’t afford public health insurance, the reality is that our healthcare administration is already far less efficient than every developed country that has switched to a single-payer system.
Again I know this is a charged topic, and obviously there’s a lot to cover, but hopefully this article gave you a better idea of why we spend so much money on healthcare. Now if you’re concerned about healthcare costs and you have a high-deductible health plan I would highly recommend opening a Health Savings Account, or HSA. HSAs offer really valuable tax benefits, and personally I max mine out every year even though I’ve never spent any of those funds on healthcare because I love getting tax-free growth. I covered HSAs on my channel so you can click here if you want to check that out. Thanks so much for reading, remember to stay tuned for more updates and to share your thoughts in the comment.
Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.