Why Is American Healthcare So Expensive?

by Arjun Singh

Americans Spend More on Healthcare: What’s the Reason Behind It?

It is no secret that Americans spend more on healthcare compared to other similar countries. The numbers speak for themselves – in 2021, the US spent a staggering 17.8% of its GDP on healthcare, amounting to $10,687 per person. In contrast, Germany, the next closest country, spent 12.8% and $6,524 per person. The disparity becomes even more apparent when comparing to countries like South Korea, which spent only 8.8% and $2,874 per person. These figures reveal that the US is indeed an outlier among industrialized nations when it comes to healthcare spending.

However, the causes of this disparity are subject to ongoing debates. Many use this fact to support various narratives about American healthcare, such as Americans being sicker or our healthcare being less effective. But the reality may be much simpler than that.

One hypothesis to explain the US outlier effect is that Americans may be generally unhealthier, and thus require more healthcare. While there are indeed important demographic differences between the US and other industrialized nations, such as obesity and diabetes rates, research shows that these differences alone do not explain the significant cost difference.

A study published in the Journal of the American Medical Association (JAMA) in 2018 found that social spending and healthcare utilization were not substantially different between the US and other similar countries. Instead, the main difference that explains the higher costs is that the same healthcare goods and services simply cost more in the US.

Administrative costs play a significant role in this disparity, estimated to be between 15% and 30% of all healthcare costs in the US. The complexity and lack of standardization in the US healthcare system contribute to this issue. Unlike many other countries, the US lacks standardized forms and rules, leading to administrative waste and excessive costs. Entire occupations, such as coding and billing specialists, do not even exist in other countries. A potential solution to alleviate this problem would be to impose standardization through thoughtful regulation.

Another contributing factor to high healthcare costs in the US is drug prices. Prescription drugs account for about 9% of total healthcare costs and 12% of personal costs, with drug costs estimated to be 2.5 times higher than in similar industrialized nations. The US pharmaceutical market lacks regulation on drug prices, allowing pharmaceutical companies to charge exorbitant prices. For some drugs, the cost in the US can be up to ten times higher than in other countries. A potential solution is to allow Medicare and Medicaid to negotiate for drug prices, ensuring more equitable distribution among industrialized nations.

Hospital care also significantly contributes to US healthcare costs, accounting for 31% of total expenses. In the US, hospital services can cost 2-3 times more than identical services in other countries. From MRI scans to knee surgeries, US hospitals charge more for the same procedures. However, utilization of hospital services is not dramatically different between the US and similar countries, debunking the idea that Americans simply use healthcare more.

To address the high and rising healthcare costs in the US, it is crucial to follow the evidence. Reducing hospital stays and healthcare utilization will only have a negligible impact. While cost-effective medicine and efficient healthcare delivery are important, they only address marginal aspects of the problem. The main focus should be on tackling the regulatory and market environment, which drives up costs.

Standardizing and streamlining healthcare administration is a logical step to reduce costs. The introduction of standardized forms and rules would minimize administrative waste and increase efficiency. Allowing Medicare and Medicaid to negotiate for drug prices is another measure with broad expert support. By bringing hospital costs in line with international standards, the US can further lower healthcare expenses.

Thankfully, these solutions are relatively straightforward regulatory issues and can be informed by examples from other nations. Adapting these strategies would allow the US to significantly reduce healthcare costs and align them with international averages, without getting caught up in complex demographic or biomedical issues that lack clear solutions.

In conclusion, while Americans may spend more on healthcare than other similar countries, the reasons behind this disparity are rooted in the regulatory and market environment. By addressing administrative costs, regulating drug prices, and standardizing healthcare practices, the US can make substantial progress in reducing healthcare expenses. It’s time for the US healthcare system to undergo necessary reforms and provide cost-effective care for all Americans.

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