Why Is American Healthcare So Expensive?

Americans spend more on healthcare than other similar countries. This fact is not in dispute – but the causes of this disparity are often debated. It is common to use this fact to support whatever narrative you want to tell about American healthcare. It is often used to imply that Americans are sicker, or that the healthcare we deliver is less effective. But there is likely a simpler explanation.

First let’s look at the numbers. In 2021 the US spent 17.8% of GDP on healthcare, $10,687 per person. The next closest country was Germany who spent 12.8% and $6,524 per person. At the low end, South Korea spent 8.8% and $2,874 per person. The US is clearly an outlier for industrialized nations.

Of note, US citizens do not have the highest out-of-pocket healthcare expenses ($1,225 per household). That would be Switzerland at $1,577. South Korea, who has the lowest total cost, has one of the highest out-of-pocket costs at $1,040. The countries with the lowest household cost were those with socialized medicine, in the $500-$800 range.

There are a number of hypotheses to explain the US outlier effect. Americans may be more unhealthy, requiring more healthcare. American healthcare may rely more on expensive advanced technology. We may deliver unnecessarily more healthcare with diminishing returns. The delivery and payment for healthcare may be less efficient. Or, Americans may be simply paying more for essentially the same healthcare. All of these things may be true to some extent at the same time.

While there are important demographic differences between US citizens and other industrialized nations, the gap in conditions like obesity and diabetes is closing and does not explain the cost difference. What the research primarily shows is that Americans pay more for the same healthcare services.

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

Part of the issue is administrative costs, which are estimated to be between 15% and 30% of all healthcare costs in the US. This is partly due to the fact that the US system is more complex than most other similar nations. The primarily problem, however, is not the complexity itself but the lack of standardization. Our patchwork system has no standardized forms or rules. There are entire occupations, such as coding and billing specialists, that don’t even exist in other countries. This is an area where thoughtful regulation could impose standardization on the industry to reduce costs and administrative waste.

Drug prices are another outlier. About 9% of total healthcare costs, and 12% of personal costs, were due to prescription drugs. Total drug costs were estimated to be 2.5 times higher than similar industrialized nations. That alone can account for a significant portion of higher US healthcare costs. For some individual drugs, they can cost 10 times as much in the US than other nations. This is entirely due to the fact that the US does not regulate drug prices while other countries do, therefore the pharmaceutical industry will simply make the bulk of its profit in the US where it can charge as much as the market will allow.

Hospital care is perhaps the single biggest contributor to US healthcare costs, amounting to 31% of total healthcare expenses. Again, in the US the same hospital services can cost 2-3 times as much as identical services in other countries. US hospitals charge more for everything from MRI scans to knee surgery.

Meanwhile, utilization of hospital services is not dramatically different in the US vs similar countries. The US is average-to-slightly-above-average in terms if ordering MRI scans and performing knee surgery.

What all this means is that if we are going to address the extremely high and rising healthcare costs in the US we will need to follow the evidence. Reducing hospital stays and healthcare utilization will have only a negligible impact. There are some marginal gains to be made when it comes to practicing cost-effective medicine. You don’t really need to prescribe that new expensive drug when and older cheaper drug is essentially equivalent. We definitely need to keep an eye on the overall efficiency of healthcare delivery and practice. But when it comes to overall costs, such measures are just nibbling around the edges.

The dominant factor in increased US healthcare costs is that we pay more for the same goods and services. This is due to the regulatory and market environment in the US. A large piece of this is also our increased administrative costs, which is likely the lowest hanging fruit when it comes to reducing healthcare costs. Standardizing and streamlining healthcare administration is a no-brainer. Allowing Medicare and Medicaid to negotiate for drug prices is another measure with broad expert support. Drug prices should be more equitably distributed among industrialized nations (while subsidizing poorer nations). Hospital costs need to be brought in line with more international standards as well.

The good news is – these are all straightforward regulatory issues which can be informed by many examples in other nations. We can dramatically reduce US healthcare costs, and bring them in line with international averages, without having to wrestle with complex demographic or biomedical issues that don’t have clear solutions.