In many ways, we have the worst of both worlds. Our system … has the illusion of a free market and the illusion of regulated market with the apparent benefit of neither.—Bill Gurley, CFA; Forbes Midas List
In his book, The Price We Pay, Marty Makary, MD, MPH, of Johns Hopkins University writes, “Half of the Amish people we interviewed said that when they or a relative gets a serious sickness, they take the Amtrak train to Mexico. Why? Because the medical quality is good and the prices are fair and disclosed up front.” How did we get to this point where American citizens are so inclined to embark on a six-day trip from Philadelphia to Mexico to get access to affordable healthcare?
This article will give an overview of the state of the US healthcare system, cover key aspects driving up prices, and touch on recent executive orders and legislation that attempt to address some of these factors (a future article will go into more depth on these recent policy changes).
The US is the only highly developed nation without universal healthcare. The term universal healthcare is often assumed to mean government-run socialized healthcare, but it simply means that all citizens are insured. How this universal coverage is achieved varies between countries and may include a mix of government subsidies and privatized options or a fully government-run healthcare system.
Switzerland is one example of a nation that achieves universal healthcare with a mandate that requires any individual who is in Switzerland for longer than three months to purchase their own private health insurance. There is no Medicare or Medicaid equivalent, but government subsidies are offered for people with low incomes.
Another method of achieving universal healthcare, government subsidies, has been a topic of public debate in the US since as early as the 1930s. The idea was resisted vehemently by the American Medical Association, which branded the idea as un-American socialism. The US didn’t have government-subsidized Medicare and Medicaid programs until 1965 with the passage of the Medicare Law.
Conversations around healthcare in the US have centered around who will pay for it. The Right believes in personal responsibility and fiscal conservatism, pushing for free market privatized solutions that give individuals more empowering choices and use market forces to drive down prices. The Left believes the government should step up to protect and care for the most disadvantaged among us. Viewing healthcare as a human right, the push is for government-subsidized Medicare for All. What if these two positions are not in conflict, as we’ve always been told?
Cost, Access, and Quality of US Healthcare
A study published in 2019 in the American Journal of Public Health found that 66.5% of all bankruptcies are due to medical issues (up from 54.5% in 2006), with over half a million Americans filing bankruptcy for healthcare related issues every year—whether from high cost of care or the inability to earn an income while getting treatment. This is not to say that citizens of other developed nations, even those with universal healthcare, never file for bankruptcy because of medical costs, but without a doubt the US is an outlier (by far) in the frequency and severity of such bankruptcies.
The Peter G. Peterson Foundation reports that in 2019 the US spent almost twice the average of other developed nations on healthcare, both per person and as a percentage of the GDP. To give some perspective, in 1970 the US spent only 7.1% of the GDP on healthcare. As the graph below shows, the percentage of the GDP spent on healthcare had risen to 17% by 2019.
How American Insurance Works
For those who aren’t familiar with how the US healthcare system works, the vast majority of Americans receive health insurance from their employers. The second most common kind of coverage is either partially or fully government-subsidized healthcare for the poor, disabled, and elderly. This is called Medicare and Medicaid. The remaining Americans with insurance have policies purchased directly from an insurance company or are covered under the military or Veterans Administration. Finally, a large portion of Americans are uninsured, which means they pay their medical bills completely out of pocket. Some Americans are self-insured or use alternatives to insurance such as medical cost sharing groups, but it’s unclear if these people are being counted as insured or uninsured in the statistics.
According to the KFF database, the number of uninsured Americans has dropped by about twenty million between 2010 and 2019. A 2016 report by the Department of Health and Human Services credits this drop to the Affordable Care Act. Between 2008 and 2019, the lowest rate of uninsured Americans was reached in 2016 and has gone up slightly since. The effects of the COVID-19 pandemic on the number of insured is not yet fully known.
Even those with insurance typically need to cover various costs out of pocket in the form of:
- premiums (monthly fees to maintain coverage)
- deductibles (set dollar amounts that the insured need to pay for healthcare services before insurance starts helping to cover costs)
- copays (a flat fee for specific services like doctor’s visits or prescriptions)
- potential “surprise bills” that can come from using an out-of-network medical service
The Financial Burden on Patients
Many of us feel the weight of this costly system. A 2018 poll by the KFF found that “About half of the public, regardless of socioeconomic status or health condition, say they are either ‘very worried’ or ‘somewhat worried’ about being able to afford unexpected medical bills or their health insurance deductible.” The same poll showed that worries about the cost of healthcare expenses dwarfed concerns about being able to afford food or rent.
These concerns are not unfounded, as “Three in ten Americans report problems paying medical bills. Of those reporting problems paying medical bills, seven in ten report cutting back on food, clothing or basic household items.” These very real issues hit close to home for many Americans.
It’s important to point out that these are not only uninsured patients who are struggling with healthcare costs. At least one-third of insured adults report difficulty paying their deductible (34%), covering the cost of health insurance each month (28%), or meeting their copays for doctor visits and prescription drugs (24%). This is in line with the “ongoing trend of rising premiums, deductibles, and other types of cost sharing in the employer-sponsored insurance market.”
Access and Quality of Healthcare
Despite spending the most on healthcare, a study by The Lancet from 2016 placed the United States 29th out of 195 nations in terms of healthcare quality and access, ranking just below Greece, South Korea, Cypress, Malta, and the Czech Republic, and just above Croatia, Estonia, Portugal, and Lebanon.
According to the CIA’s current World Factbook, life expectancy at birth for Americans is 80.43 years, ranking 46th out of 227 nations.
So, while US healthcare provides good quality with good outcomes overall, we fall behind many other developed nations in terms of access and quality, and the results are certainly not on par with the exorbitant costs being paid for care.
Factors Contributing to High Cost of US Healthcare
Let’s dig into the major factors that are contributing to the high cost of healthcare in the US. This list should not be taken to be exhaustive, as the US healthcare system is incredibly complex, and the factors contributing to the high costs are numerous.
In 2019, the US spent $940 per person on medical administrative costs. The American Hospital Association (AHA) estimates a total of $39 billion annually on regulatory burdens alone. That’s the highest of any nation and a whopping four times more than the average of other developed nations.
A study from 2018 published in the Journal of the American Medical Association (JAMA) compared a number of aspects of the US healthcare system to other high-income countries, concluding that administrative costs were one of the major drivers of the difference in overall healthcare spending.
An October 2017 report by the AHA expressed concerns about regulatory overload, finding that clinical staff were being pulled away from patient care responsibilities in order to fulfill regulatory requirements full time. The report argues that quality-reporting requirements are often “duplicative and have inefficient reporting processes,” and “fraud and abuse requirements are outdated.”
The Price We Pay points out that if regulatory administrative costs are a burden, the infrastructure, subcontractors, businesspeople, consultants, vendors, and well-paid middlemen that have grown up to support the business of healthcare certainly contribute to these high costs.
In fact, a study from 2014 found that approximately 65% of the administrative spending went to billing and insurance (BIR) administration, and an earlier study from 2009 identified almost seven non-clinical full-time staff working on billing and insurance functions for every one physician. Would anyone really say this is the best use of our money?
Surprise Medical Bills
Did you know that you can have insurance, go to a hospital that is in your network, and still incur huge out-of-network medical bills for your treatment? “Surprise medical bills” generally refers to unexpected bills for services you thought would be covered by your insurance. In fact, NPR has a special series called “Bill of the Month” which covers the stories of individuals who have been hit by surprise medical bills.
A 2018 survey found that “57% of American adults have been surprised by a medical bill that they thought would have been covered by insurance.” This includes “particular services (e.g., certain lab tests) or products (e.g., certain prescription drugs)” as well as “care received before meeting the deductible or high cost-sharing requirements” and individual physicians who are out-of-network for a plan.
One way in which these surprise medical bills can manifest is in services such as air ambulances (helicopters) which are now typically operated by private for-profit companies which have been shown to pick up patients even when they don’t need it and leave them with huge bills that their insurance won’t cover.
Another way is out-of-network physicians working at in-network hospitals. A study from 2017 by the National Bureau of Economic Research notes that “because patients do not choose their emergency physician, emergency physicians can remain out-of-network and charge high prices without losing patient volume.”
Another study from May 2020 published in JAMA revealed that most hospitals’ billing staff don’t know themselves whether your emergency room doctor’s bill will be covered by your insurance or not. This means that in most cases there is nothing you can do to prevent a surprise out-of-network bill before it happens, even if you actively call ahead to try to find out if the procedure will be covered by your insurance and do everything right. Thus, the researchers suggest that congress should pass legislation to “eliminate out-of-network penalties and prior authorization requirements for emergency care and provide standardized, available pricing that applies equivalently to all.”
Since then, Congress has passed legislation aimed to counteract surprise medical billing as part of the omnibus spending bill which passed in December of 2020. We’ll discuss this in more depth in a future article on recent policy changes.
Secret Pricing and Exorbitant Markups
The Price We Pay compares the US healthcare system to an Egyptian bazaar. If you’ve ever been to a bazaar, you might have noticed the items don’t have a price tag. Depending on your bartering chops the price you get can be significantly different.
Dr. Makary gives the example of an item worth $1 which the shopkeeper says costs $100. Some will haggle a bit and congratulate themselves if they can get the price down to $90. Others will cut it down to $50 and think they got a steal. But remember, the item is worth $1. By not listing the price the shopkeeper can set a price that varies based on their assessment of the customer and the understanding that once you’ve set the price to $100 even $50 feels like a great deal.
We can see this dynamic play out in the US healthcare system in an example from Dr. Makary’s book of a French citizen visiting his son in the US. The father has a minor heart attack and needs elective heart surgery. He’s told the price for the surgery will be $150,000. Just to check, his son calls a doctor in France and is told the price would be $15,000 in France for the same surgery, same quality.
Understandably, the Frenchman’s son goes to the US hospital’s financial representative and tells him that his father is going to get the surgery in France due to the price being so much cheaper. Just like bartering in the bazaar, the financial representative immediately drops the price to $50,000. Startled, the Frenchman declines. As he walks away, the financial rep gives him a final offer of $25,000—an 83% drop from the original price.
Imagine if he had been an uninsured American who didn’t have the option to just “walk away” to France, or if it was a surgery his insurance wouldn’t cover, or if it had been an emergency and he’d been caught with a surprise bill after the fact. We’re talking about life-altering amounts of debt.
A 2018 analysis of the oncology services of 3,248 hospitals in all 50 states found that there were high markups (when compared to the price medicare pays) with significant variation in markup ratios by hospital. This means some hospitals are overcharging more than others.
Another study from 2017 (using data from 2013) showed just how great that variation was. The study “compared physician charges with what the Medicare program would pay emergency medicine physicians for the same service” and found that markups in emergency departments varied by hospital from a range of Medicare cost to a 1,160% excess charge markup. Meanwhile internal medicine services by hospital ranged from Medicare cost to a 1,310% markup.
The range is incredible, but it’s also concerning to note that the median markup for emergency departments is 320% while the average markup for internal medicine is just double the Medicare price. This means that Americans are being taken advantage of by the most consistently high markups when they’re most vulnerable—in emergency rooms.
One could say the Frenchman was lucky to be told the price. Oftentimes US hospitals won’t even give out the pricing of procedures to patients ahead of time. In 2016, a Vox journalist called numerous hospitals and wasn’t able to get a straight answer on how much it would cost to deliver his son. However, a rule put in place through an executive order by President Trump is set to change this, though the AHA is encouraging the Biden Administration to enforce it loosely or repeal it completely. This will be discussed further in the upcoming article on recent healthcare-related policy changes.
Outdated Patent Laws and Stifled International Competition
Patents are meant to allow drug companies to recoup the costs of innovating new drugs by protecting the intellectual property for a set period of time. However, American drug companies regularly abuse the patent system to extend their monopolies on certain drugs and keep prices high. There are many ways they do this. Often, it’s by repackaging drugs with expired patents with just enough difference that they can be re-patented—such as by combining two pills into one, changing the delivery mechanism, or creating different dosage formulations such as a pill you take once a day instead of three times a day. They then protect this similar drug with a “patent thicket” to scare away competitors.
This is completely legal.
Branded drug prices increased by an average of 68% from 2012 to 2017. In 2017 alone, insurance companies, Medicare/Medicaid, and private consumers spent a whopping $96 billion on the twelve highest grossing drugs alone.
A KFF poll from 2016 found that a staggering 8% or 19 million Americans had either purchased drugs from a foreign country due to high drug prices in the US or knew someone who had. Bringing those drugs back to the US is illegal according to FDA regulations if the drugs are being commercially promoted to people living within the US.
A previously-mentioned article published in JAMA identified that in 2016 US spending per capita on pharmaceuticals was $1,443, contrasted with a range of $466 to $939 in ten other wealthy, developed nations. The study concluded that the cost of pharmaceuticals appeared to be one of the major factors driving the difference in overall cost between US healthcare spending and that of the ten other high-income nations examined.
Note that it’s not necessarily that patents are bad. Patents can be good things that allow us to reward the ingenuity of inventors who create new medicine which makes the world a healthier place. It’s also not necessarily that the pharmaceutical corporations are evil for using patents in this way. They’re just working within the constraints of what’s legal within our current system. Some forward thinkers suggest that the answer is to reinvent our patent system so that it once again works for the people.
Another executive order signed in 2020 takes aim at the exorbitant prices paid for pharmaceutical drugs in the US. While the US leads the world in medical research and development spending (with 21.9% of this spending coming from federal government tax dollars), American consumers also pay the most for the innovations that are developed. A study by the RAND corporation published in 2021 compared the cost of prescription drugs in America to that of 32 Organisation for Economic Co-operation and Development nations, finding that the pharmaceuticals in America cost an average of 190% more for consumers, even after being adjusted to account for rebates and other discounts.
As the executive order states, “The Council of Economic Advisers has found that Americans finance much of the biopharmaceutical innovation that the world depends on, allowing foreign governments, many of which are the sole healthcare payers in their respective countries, to enjoy bargain prices for such innovations.”
Noting that “Other countries’ governments regulate drug prices by negotiating with drug manufacturers to secure bargain prices,” the executive order aims to secure the “most-favored-nation price” for the US.
This will be discussed further in the upcoming healthcare policy changes article.
Monopolies and Consolidation of Power
Hospital consolidation has been occurring at an alarming rate for over a decade, spurred on by incentives in the Affordable Care Act and decreasing use of inpatient care. According to the KFF, there were 778 hospital mergers between 2010 and 2017, and it’s suggested that the financial pressure on healthcare providers due to the COVID-19 pandemic is likely to lead to an even greater increase in mergers in the coming years.
Consolidation can happen horizontally, with healthcare services such as hospitals or insurance companies acquiring or partnering with others to form networked systems, or it can happen vertically, such as when hospitals integrate independent physicians into their staff. It’s well documented that hospital consolidation results in significantly higher prices for consumers, with little evidence that quality of care improves, and some evidence to suggest that quality might actually decrease as mergers increase. Unsurprisingly, a 2019 publication in the journal Medical Care Research and Review found that “with fewer competitors it seems that there is less incentive to keep patients content.”
However, a 2020 report by the Healthcare Financial Management Association (HFMA) takes a more positive outlook towards consolidation, suggesting that there’s a difference between mergers occurring with the aim of increased efficiency and delivery of value to the patients and those seeking market dominance. In this case, they say, “motivation matters.”
While acknowledging that in the past consolidation has consistently resulted in higher prices for consumers, the report also suggests that a new executive rule about price transparency, as well as rising patient out-of-pocket costs could create market forces that “discourage aggressive pricing strategies in the face of reduced competition.” This remains to be seen.
The HFMA report also suggests that the major drivers for upcoming consolidation are the need for sophisticated management expertise, access to large amounts of capital investments, and new requirements from the Medicare and CHIP Reauthorization Act, which took effect in 2019 and could push solo or small practice physicians to seek employment at larger organizations.
Commentator Kevin Roche of Healthy-skeptic.com suggests that “hospital consolidation and hospital acquisitions of physician practices is… the major driver of health spending growth.”
Not only are segments of the healthcare industry consolidating at a rapid pace, there are also barriers to entry for new competitors called certificates of need which “require legal documentation before new hospitals, insurers or pharmaceutical companies can expand or enter into a state or jurisdiction.”
The stated purpose of these certificates is to improve cost, access, and quality of healthcare services. However, some express concern that “we have built in all sorts of regulations that needlessly prevent the sort of competition that would result in prices heading downwards.”
It’s Expensive to be an (American) Doctor
A 2014 study published in Health Affairs concluded that higher physician fees contributed to the US’s excessive spending on healthcare. This was confirmed by a study published in JAMA in 2018 which compared a detailed breakdown of US healthcare expenditures with ten other highly developed nations and found that US physicians and nurses were paid substantially more than in the other nations. For example, generalist physicians in the US earn an estimated salary of $218,173, while the same position in the other nations ranged anywhere between $86,607 to $154,126.
This could be because of how expensive it is to become a doctor in the US, with the cost of medical school continuing to rise at an alarming rate. In fact, an article by BestMedicalDegrees.com titled “The Deceptive Salary of Doctors” asserts that after taking into account the time and cost of getting a medical degree, completing residency, taxes, licensing, and certification, doctors actually earn three cents less per hour than teachers.
In an article published April 2021, Medpage Today talks about how certification boards form monopolies and rake in millions of dollars annually by “taxing” practicing physicians to renew certification.
This doesn’t even account for the exorbitant cost of malpractice insurance, which is $7,500 annually on average and could range from $30,000 to $50,000 a year for surgeons and $4,000 to $12,000 a year for other medical personnel.
It’s clear there are deep-rooted problems with our healthcare systems in the US. Much of this stems from ineffective and outdated government interventions, regulatory excesses, obsolete patent laws, limits on competition in the pharmaceutical industry, and certificates of need.
We also see a vast amount of administrative bloat from maintaining the business of healthcare, monopolies forming through consolidation, and secret pricing limiting the ability of supply and demand to regulate the market.
The interplay between corporate interests and government regulations is a complex web to untangle, but it’s clear that our current system is neither a free market nor an efficient socialized one. Creating a system that truly works for the American people with fair pricing and the best quality of care will likely require a drastic reimagining of our healthcare system. Solution-based conversations may prove most effective when centered around how to address the root causes that are driving up pricing, as well as how to achieve affordable healthcare coverage for all, whether that’s through government programs, privatized options, or some mix of the two.
In our upcoming healthcare articles we will discuss recent policy changes in greater depth and explore another important area which contributes to the high spending on healthcare: inappropriate care for profit. As Dr. Makary states in The Price We Pay, “the two root issues driving health care’s cost crisis [are] the appropriateness of care and pricing failures.”
Editor: Craig Carroll Peer Review Completed By 5 Individuals