Why American healthcare is so expensive

  1. One thing the U.S. system has in common with single-payer model, most patients don’t worry about cost of medical treatment
  2. U.S. system incentivizes providers to overcharge
  3. Not all U.S. health issues blamed on dysfunctional healthcare system

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Community member Donald Boone asked: Why are healthcare outcomes in other industrialized countries better than in the United States, even though the cost of healthcare in other countries is typically lower than in the United States?

To answer this question, we need to focus on why healthcare in the United States is so expensive, and then understand how this ends with people being less healthy as a result.

The United States spent $3.3 trillion on healthcare in 2016. That’s more than $10,000 per person, according to the Center for Medicare Studies. By comparison, Canada spends roughly $6,600 per person (Canadian Institute of Health Information).

This discrepancy in cost is driven by two factors: how prices are set, and how medical bills are paid. In countries such as Canada with “single-payer” systems, this process works simply. The government sets the price for a medical procedure (Business Insider). Once doctors perform these procedures, they charge the government for reimbursement. In these systems, patients don’t worry about the costs of medical treatment. Some may pay a fee for visits, depending on their income, but largely, the costs and payments are handled by the federal and provincial governments.

Meanwhile, the United States healthcare system is a complex patchwork of government and private companies that cover different segments of the population, but not everyone. One thing the U.S. system has in common with the single-payer model is most patients don’t worry about the cost of medical treatment.

There are two large groups of people who are the exception to this rule: the uninsured and underinsured. These groups are keenly aware of the costs of healthcare in the United States. The average cost of a Silver plan, a common option on Affordable Care Act exchanges, is $328 a month. This can also carry a $7,000 deductible — the price an individual must pay before the insurance kicks in (Forbes).

Who sets prices and why they’re so high

The price tag for medical treatment depends on the coverage one has. Prices under Medicare, government-sponsored insurance coverage for the elderly, are set by a private organization called the RVS Update Committee, also known as RUC. Prices under Medicaid, government-sponsored coverage for the poor and Veterans Affairs, are set by the government, similar to single-payer systems.

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Prices for private insurance are essentially negotiated between insurers and the doctors and hospitals who treat patients. As hospitals in the United States continue to merge they gain the market power to charge even more (Yale Insights). For example, according to healthcare blog Amino, the cost of an appendectomy can differ from $9,884 to $18,585, depending on insurer, hospital, and geographic location.

The cost is near zero for patients with top-tier private insurance. They tend to belong to the 56 percent of Americans who are covered through their job. The insurance company covers the entire tab aside from a $10 to $50 “co-pay” expense.

When hospitals set prices and insurers pay, patients and doctors have no reason to think about cost, let alone value the staggering numbers.

Unsurprisingly, this system incentivizes providers to overcharge, which leads to increasing premium prices for insurance – and prices keep getting higher. Even top 500 companies that can afford the best insurance plans in the country are increasingly passing healthcare costs on to their employees.

Read more, and add more, on WikiTribune’s reporting on employer-based coverage in the United States.

Reducing cost by making people think about it 

The Affordable Care Act, also known as Obamacare, accomplished a few key changes, such as expanding Medicaid and covering those with pre-existing conditions. But the law has struggled to reduce the cost of insurance, despite forcing every uninsured person to purchase a plan. The cost of a Silver plan (a common option) in New York is $286 a month for someone making $40,000 a year. With a deductible of over $7,000, it’s a steep price to essentially remain unable to afford medical care. 

The political left’s solution is to adopt a system similar to Canada’s, and allow the government to set healthcare costs. Senator Bernie Sanders, a socialist independent, has led the charge in Congress to move the United States toward a single-payer system, which he refers to as “Medicare for All.”

For Sanders’ vision to be possible, however, a plan will have to follow a far more solvent model than Medicare, which will likely require increased taxes, reduced services, or increased individual contributions from recipients after 2028 (Wall Street Journal) to remain viable. Medicare’s financial woes partly stem from the federal government being barred from negotiating competitive prices for prescription drugs, which is a key component of the single-payer model (Canada Medical Association). By empowering the government to set prices and select which treatment demands priority, single-payer reduces the cost of healthcare.

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Alternatively, political conservatives have their own ideas of how to reduce costs: force patients and doctors to think about costs before they receive care.

The Republican Party is far from united on what this conservative plan looks like, but it likely starts with creating a direct relationship between doctors and patients. This means minimizing the role of “third party” groups, such as government and private insurance companies.

The idea is that if everyone pays directly for their own healthcare, hospitals won’t be able to systematically overcharge, and prices will drop. Where this model is applied, costs for patients and the healthcare system are dramatically lower.

“Direct primary care,” in which patients pay a monthly flat-fee subscription to their doctor, has been able to offer lab tests and prescription drugs at wholesale prices by cutting insurance companies out of the equation. The difference can be of hundred of dollars, according to an article on Business Insider.

Healthcare system not entirely to blame for poor health

While liberal and conservative solutions to healthcare costs differ significantly, there is a shared goal toward promoting the long-term health of the patient, known broadly as “health outcomes.”

The U.S. Centers for Disease Control defines health outcomes as a statistic that takes into account “being alive; functioning well mentally, physically, and socially; and having a sense of well-being.”

Other organizations have different definitions, but use the same overarching metrics, such as life expectancy, number of healthy years, and mortality of those with chronic conditions and preventable diseases (Health Catalyst).

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No matter how you measure health outcomes, the United States is consistently at the bottom of the list (Commonwealth Fund). But not all of America’s health issues can be traced to the country’s healthcare system.

The Robert Woods Johnson Foundation, a healthcare research firm, found that 80 percent of poor health outcomes in the United States are the result of lifestyle, diet, and environmental pollutants. The foundation refers to these as “social determinants,” many of which are linked to poverty.

People from a lower socioeconomic background are more likely to smoke (Washington Post), more likely to live in areas with polluted air (Scientific American) and consume junk food (Sociological Science). So while the U.S. healthcare system struggles to contain costs, public health professionals must also grapple with how to address unhealthy factors that occur outside of hospital grounds.

Where the healthcare system does contribute to the national health crisis, is that doctors are incentivized to see as many patients as possible, instead of making patients well (RAND). By not prioritizing what happens to a patient years down the road, doctors can over-prescribe and over-treat conditions that not only drive up costs but also may not necessarily make patients healthier.

Shaping a healthcare system around health outcomes requires moving away from the fee-for-service model that insurance companies support. The Cleveland Clinic and Mayo Clinic, considered two of the best medical facilities in the country, pay their doctors a flat salary to avoid any incentives to over-treat patients (New York Times). 

Changing the way doctors are reimbursed is just one aspect of what’s known as “value-based” care, and it’s not limited to the United States (Boston Consulting Group). The Martini Klinik, a prostate cancer surgery group in Germany, measures success based on factors such as rate of cancer recurrence, erectile dysfunction, and incontinence – common issues with prostate cancer patients (Harvard Business Review). As a result, 93.5 percent of Martini patients are fully continent after surgery, whereas the national average is 56.7 percent. And 34 percent of Martini patients experience erectile dysfunction, while the national average is 75 percent (University of Hamburg).

Judging a doctor on health outcomes may seem obvious, but at this point it’s more the exception instead of the rule in the United States. Patients may return to their doctor after an initial treatment, and that doctor will profit from the repeat customer.

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