By: Tzvi Levitin  | 

Stop Simplifying the Problem: Why is American Health Care so Expensive?

As America enters the 2016 presidential primary season, we can expect heated debates amongst the candidates on issues ranging from gun control to education reform, health care to foreign policy, and immigration to Planned Parenthood. While these hot-button topics make great small talk material (“Is it just me, or does Rubio mention Jesus more than Hillary tries to use slang?” or “How did he turn a question about Kim Davis into a rant against ISIS?”), they also entice us to crown ourselves experts; we align our views with candidates we already support, echo their sentiments, and consider ourselves part of the “discourse.”


However, we get an incomplete picture from watching Democrats and Republicans duke it out. In truth, politicians ignore the complexity of major economic and social issues in order to separate themselves from their opponents and connect with a large audience in a restricted amount of time. Essentially, candidates provide us with Snapchat versions of the facts and their opinions in order to suit the short attention spans of the media and the public. The ways we consume media further distill and trivialize the issues; tweets take quotes out of context, Buzzfeed summarizes entire debates in listicles, and Saturday Night Live reduces campaign endorsements to seemingly unconnected strings of words (“Right-winging, bitter-clinging proud clingers of our guns.…” Bad example, it turns out that one was completely real).


Political theater notwithstanding, campaign season provides a great opportunity to familiarize ourselves with current problems facing our country. Health care, a mainstay on the political agenda, imposes a great stress upon the American economy. According to the World Bank, health care costs in the US are significantly higher than in other developed countries with safe and reliable health resources; the average American spends over $9200 on health care each year, as compared with $5700 in Canada, $5000 in Germany, and $3600 in the United Kingdom.


The most common misconception about higher costs in the United States relates to our privately funded health care system. Many people assume that health care is cheaper in Europe and Australia because citizens pay higher taxes, and the government places these taxes in a public fund spent on health care. However, according to data collected by The Organization for Economic Cooperation and Development (OECD), an international economics forum with members from 34 market economies around the globe, the United States spends more tax dollars per capita on health care than the UK, Canada, Australia, and many other developed countries:


This data is surprising because even though Americans devote more tax dollars to public health care than other developed countries, far fewer people actually benefit from these tax dollars. Whereas taxes subsidize health care costs for all citizens in the countries on the graph excluding the US, only 28% of Americans receive publicly funded health care in the United States; we pay more taxes towards health care than we would if we were Canadian, yet we do not get free health care in return. Instead, our health care tax dollars are only enough to pay for beneficiaries of Medicaid, Medicare, and public sector employee health care. Which is not to say that these programs are bad; given the health care funds we do have available, Medicaid and Medicare are likely the best ways to allocate those funds. But why don’t we have enough money to pay for everybody’s health care, like in the UK and Canada?


As the graph indicates, we need to spend thousands of dollars more per capita in the private sector to pay for our health care; we spend 18% of our GDP on health care, almost twice as much as the average of all free market democracies, about 9.5%. This means that once you adjust for our country’s wealth and population, we spend about $1.5 trillion more on health care per year than you would expect.


There are several theories as to why Americans spend so much more on health care. In his blog entitled The Incidental Economist, Aaron Caroll notes several “red herrings” – things people often believe are to blame for our higher health care costs but which in fact have little to no impact on our spending, either because we overestimate their importance or because they are completely false. For example, some claim America’s population is older than populations of similar countries, which places extra demands on the health care system. However, according to OECD statistics, the US has the lowest percentage of people over the age of 65 among the countries in the above graph, and the highest percentage of people below the age of 19.


Others suggest Americans are less healthy than our European counterparts – we are more obese, we smoke more, and we drink like sailors. Proponents of this view believe these risk factors lead to higher incidences of illness and disease, particularly cardiovascular diseases, thereby increasing our visits to the doctor’s office and prescription drugs. While anecdotal evidence such as the Heart Attack Grill in Las Vegas (where diners over 350 pounds eat free and waiters encourage customers to order “Quadruple Bypass Burgers” and “Flatliner Fries”) would seem to support this theory, we actually have lower smoking and drinking rates than the countries in the graph, according to data analyzed by Caroll. And while Americans are indeed more obese, Caroll claims the increased medical costs associated with our higher incidences of disease would account for only $25 billion of the approximately $1.5 trillion in extra health care spending per year.


Another popular gripe against US health care accuses American doctors of ordering redundant tests to protect themselves from malpractice suits. However, defensive medicine accounts for less than 2% of our total health care costs – about $46 billion, according to the Cleveland Clinic. In fact, in recent years, many states have passed laws preventing physicians from ordering unnecessary scans, and those states have not exhibited any significant decreases in health care spending.


These statistics mean that Americans are not over-utilizing the health care system enough to account for our inflated health care spending. We don’t get sick more often (significantly, at least), we don’t visit the doctor more, and we don’t undergo more procedures. In order to figure out why we spend so much more, we need to figure out the areas in which we spend more than you’d expect given our population and wealth.


In 2013, John Green made a video for his YouTube channel, Vlogbrothers, attempting to explain this phenomenon. As with most problems involving $1.5 trillion, claims Green, the truth resists simplicity; hundreds of considerations likely influence our higher health care costs, but four main factors account for a total of roughly $750 billion in extra spending. Firstly, doctors are paid more in the US than in any other country in the world; adjusting for America’s economy, Green claims we spend about $75 billion more than we would expect in this area. Private insurance and administrative costs, such as marketing and negotiations and hospital management, make up another $90 billion in spending above what an economy of our size would be expected to spend if we budgeted our money like the UK and Canada. This results in large part from to the increased marketing and administrative costs spent by private insurance companies, expenditures largely unnecessary in countries with public health insurance.  


The final two factors Green discusses account for a combined $600 billion in extra spending, and both stem from the same fundamental issue with how Americans interact with the health care system. Higher drug prices make up $100 billion in extra spending; prescription drugs cost significantly more in the US than they do in other countries. In December, the New York Times editorial board published a piece highlighting the outlandish drug prices observed almost exclusively in the US. For example, last August, Turing Pharmaceuticals acquired the marketing rights for Daraprim, and raised the price of this life-saving anti-parasitic drug from $13.50 per pill to $750 per pill, a 5500% markup. While this example lies on the extreme end of the spectrum, American pharmaceutical companies often charge unjustifiable prices for their drugs.


Finally, we arrive at the largest source of excess health care spending: inpatient and outpatient care, which rack up $500 billion more than what we would expect per year. It bears reiterating that this spending does not result from Americans receiving more inpatient and outpatient care, it results from the care we do receive being far more expensive. And this, along with the astronomical drug prices, stems from our lack of ability to negotiate with health care providers, medical device manufacturers, and pharmaceutical companies. In the UK and other countries, where the government provides its citizens with health care, the government can negotiate aggressively with health care providers to ensure the best devices are being provided at the best price. The government chooses only the MRI machine manufacturer with the best quality at the lowest price, and signs a contract for all publically funded MRI facilities. In turn, all MRI machine manufacturers try to make cheap and high-quality MRI machines so they can nab the huge government contract, and these cheaper prices carry over into the privately funded medical facilities as well. With the exception of Medicare, which negotiates much lower prices for its beneficiaries, there exists no such centralized negotiation in the US. We can’t negotiate lower prices for our own health care because we can’t assign a value to our own health; as Green puts it, “We can’t put a price on not dying.” This is known as inelastic demand: drug companies and hospitals can charge whatever they want because we need the products and services they provide, and without somebody negotiating on our behalf, we give them whatever they ask for.


All things considered, there exists no simple solution for America’s health care problem, no matter how many politicians may try to convince us they’ve developed one. People say it’s malpractice suits, or it’s physician salaries, or it’s obesity, or it’s hospitals, or it’s drug companies. But in truth, notes Caroll, “It’s all of these things, and more.” To create systems in which we have more control over our own health care costs, we need to understand where our money goes, and why. When it comes to understanding, however, we hate all things nuanced and pedantic; we prefer to understand effortlessly and enjoyably. Unfortunately, until Aziz Ansari manages to create an episode of Master of None to explain our health care system in a hilarious and insightful way (as only Aziz can do), the burden lies on us to seek out the truth, no matter how much it resists simplicity.


Unless otherwise noted, data for this article comes from The Organization for Economic Cooperation and Development.