I want to talk today about why healthcare costs in the United States are so phenomenally, fascinatingly expensive(That's with or without an insurance), but first I have to blow your mind:
Alright, so you've probably heard that the reason that people enjoy "free" healthcare in Australia and the UK and Canada, etc, etc is that they pay higher taxes. That money then goes into a big pot and is used to pay for people's healthcare, but in fact, in the US, we spend more tax money per capita on healthcare than Germany, Australia, the UK,or Canada.
That's right you pay more in taxes for healthcare than you would if you were British,and in exchange for those taxes, you get no healthcare.In fact, only about 28% of Americans get their health insurance through government funded programs, mostly poor people, old people, and Congress people. But private healthcare spending (most Americans are privately insured through their employers) is WAY higher than anywhere else in the world.In total, the US currently spends about 18% of its gross domestic product on healthcare costs.Australia by comparison? 9%.
Why is this? Well because everything costs more, which seems obvious, but apparently isn't, because every article you read is like "Oh it's because of malpractice insurance" or "it's because we're obese" or we go to the doctor too much or people are prescribed too many medications.
Well, not really.It's because everything costs more. A hip replacement in Belgium costs $13,000. In the US it's often over $100,000. Colonoscopies average over $1100 a piece in the US; in Switzerland they're $655. And on average a month of the drug Lipitor will cost you $124 if you live in the US. If you live in New Zealand? $7.Now we are also—not to brag—richer than all of these countries, so it makes sense that we should spend a little more on healthcare. But we don't spend a little more. We spend a ton more. And vitally, we don't get anything for that money, which means we are essentially
paying people to dig holes and then fill those holes back up. Like we don't live longer—in fact we're 33rd in life expectancy—and in everything from asthma to cancer, according to one recent nonpartisan study, American healthcare outcomes are "not notably superior."So why are we spending all of this money for nothing?
Well first, let's discuss some of the problems that are not actually problems.For instance, the problem is not so-called "overutilization:" the idea that Americans go to the doctor more and get more tests and spend more time in hospitals. We know this because Americans actually go to the doctor less than Europeans and spend much less time in hospitals, although to be fair, you can stay in a Dutch hospital for seven nights for what it costs to stay in an American hospital for one night, so no wonder we're hesitant.Also it is not because we're sicker than other people. Everyone likes to blame obesity on our rising healthcare costs, but yeah, no. That argument is just not supported by data.For one thing, disease prevalence does not affect healthcare costs that much. And for another thing, while we do have more obesity in the United States, which sometimes leads to health problems, we have fewer smokers and less alcohol consumption (really? Apparently yes). So that saves us a little money, and if you compare us to like the British or the French, in the end it's probably a wash. The truth, as usual, is complex. Like, there are obvious inefficiencies in our healthcare system. For instance, not everyone has insurance. If you don't have insurance, you still get healthcare, but you're responsible for paying for that healthcare, which often you can't do, so you end up going bankrupt. That sucks for you, obviously, because you're bankrupt,but it also sucks for the rest of us because we have to pay not only for your care, but also for all the money the hospital spent trying to get you to pay for your care. Also
the only options available to uninsured people are usually the most expensive options, like emergency rooms, which is just BANANAS. But those inefficiencies are hard to measure. Fortunately,there are things we can measure.So like I said before, because the US is one of the richest countries in the world, youwould expect us to pay a little more for healthcare than most people. The question is, when dowe pay MORE than you would expect us to pay, and that turns out to be pretty interesting.
Let's start with malpractice and so-called "defensive medicine." The idea here is that doctors are scared of huge malpractice suits so they order a lot of unnecessary tests in order to, like, cover their butts. That does contribute to our healthcare costs, like there are more MRI and CT scans in the US than anywhere else. However, there are a bunch of states like Texas that have passed tort reform to limit malpractice suits, and in those states healthcare costs have dropped by an average of a whopping 0.1%. The biggest estimates for the total costs of defensive medicine put it at around 55 billion dollars, which is a lot of money, but only 2% of our total healthcare costs. Another smallish factor: doctors (and to a lesser extent, nurses) are paid more in the US than they are in other countries, and by my possibly-faulty math we end up spending about 75 billion dollars more than you would expect us to there.And then we have the cost of insurance and administration costs, like paperwork and marketing and negotiating prices. That's about 90 billion dollars more than you would expect us to spend. We spend about $100 billion more than you would expect on drugs, not so much because
we take MORE of them, but because the ones we take cost more per pill.
Okay, and now for the big one. I'm gonna lump inpatient and outpatient care together, because
in the US we do a lot of things as outpatient procedures, like gallbladder surgeries, that
are often inpatient procedures in other hospitals. We're just gonna make a big ball.
That big ball is $500 billion more than what you would expect given the size of our economy.
Per year.
Why? Because in the United States we do not negotiate as aggressively as other countries do with
healthcare providers and drug manufacturers and medical device makers. So like in the UK the government goes out to all the people who make artificial hips and says "One of you is going to get to make a crapton of fake hips for everybody who is covered by the NHS here in the United Kingdom. But you better make sure your hips are safe, and you better make sure that they are cheap, because otherwise we're going to give our business to a different company." And then all the fake hip companies are motivated to offer really low prices because it's a really huge contract. Like think if your company got to put hips inside of everyone in England and Scotland and Wales and Northern Ireland (I guess not everyone.Just the people who need hips).
But in the US we don't have any of that centralized negotiation, so we don't have as much leverage.
The only big exception is Medicare, the government-funded healthcare for old people, which, not coincidentally, always gets the lowest prices.So basically,in the United States, providers charge whatever they think they can get away with, and they can get away with a lot, because it's really difficult to put a price on, like, not dying. This is a phenomenon called "inelastic demand," like if you tell me that this drug will save my life costs $7 a month, I will pay you $7 a month for it. If you tell me that it costs $124 a month, I will find a way to find $124 a month to pay for it. You can't negotiate effectively on your own behalf for healthcare services because you NEED them. And not like you need a Macbook Air or the new season of Sherlock, but actual, physical need (I guess it is like the new season of Sherlock).So basically, until and unless we can negotiate as effectively with the people providing healthcare as Australians and British people do, US healthcare costs will continue to rise
faster than anywhere else in the world and we WON'T get better healthcare outcomes. I am so
tired of people offering up simple explanations for what's wrong with our healthcare system.They say "Oh, it's malpractice," or "it's doctors who must also be businesspeople" or it's insurance companies or "it's insane rules for who can GET insurance." It's drug companies, it's government bureaucracy, it's an inability to negotiate prices.
Yes, yes,yes, yes, and YES! It is all of those things and more! It is not a simple problem, there
will not be a simple solution, but it is probably the biggest single drag on the American economy
and it's vital that we grapple with it meaningfully instead of just treating healthcare costs as political theatre.
So I hope I've at least introduced the complexity of the problem.Welcome back to the United States. As you can see, everything is peachy here.Friendly reminder, educational blogs are allowed to be long. All of the people who are commenting about how punished I am, did not read to the end of the blog.I feel dizzy.
Alright, so you've probably heard that the reason that people enjoy "free" healthcare in Australia and the UK and Canada, etc, etc is that they pay higher taxes. That money then goes into a big pot and is used to pay for people's healthcare, but in fact, in the US, we spend more tax money per capita on healthcare than Germany, Australia, the UK,or Canada.
That's right you pay more in taxes for healthcare than you would if you were British,and in exchange for those taxes, you get no healthcare.In fact, only about 28% of Americans get their health insurance through government funded programs, mostly poor people, old people, and Congress people. But private healthcare spending (most Americans are privately insured through their employers) is WAY higher than anywhere else in the world.In total, the US currently spends about 18% of its gross domestic product on healthcare costs.Australia by comparison? 9%.
Why is this? Well because everything costs more, which seems obvious, but apparently isn't, because every article you read is like "Oh it's because of malpractice insurance" or "it's because we're obese" or we go to the doctor too much or people are prescribed too many medications.
Well, not really.It's because everything costs more. A hip replacement in Belgium costs $13,000. In the US it's often over $100,000. Colonoscopies average over $1100 a piece in the US; in Switzerland they're $655. And on average a month of the drug Lipitor will cost you $124 if you live in the US. If you live in New Zealand? $7.Now we are also—not to brag—richer than all of these countries, so it makes sense that we should spend a little more on healthcare. But we don't spend a little more. We spend a ton more. And vitally, we don't get anything for that money, which means we are essentially
paying people to dig holes and then fill those holes back up. Like we don't live longer—in fact we're 33rd in life expectancy—and in everything from asthma to cancer, according to one recent nonpartisan study, American healthcare outcomes are "not notably superior."So why are we spending all of this money for nothing?
Well first, let's discuss some of the problems that are not actually problems.For instance, the problem is not so-called "overutilization:" the idea that Americans go to the doctor more and get more tests and spend more time in hospitals. We know this because Americans actually go to the doctor less than Europeans and spend much less time in hospitals, although to be fair, you can stay in a Dutch hospital for seven nights for what it costs to stay in an American hospital for one night, so no wonder we're hesitant.Also it is not because we're sicker than other people. Everyone likes to blame obesity on our rising healthcare costs, but yeah, no. That argument is just not supported by data.For one thing, disease prevalence does not affect healthcare costs that much. And for another thing, while we do have more obesity in the United States, which sometimes leads to health problems, we have fewer smokers and less alcohol consumption (really? Apparently yes). So that saves us a little money, and if you compare us to like the British or the French, in the end it's probably a wash. The truth, as usual, is complex. Like, there are obvious inefficiencies in our healthcare system. For instance, not everyone has insurance. If you don't have insurance, you still get healthcare, but you're responsible for paying for that healthcare, which often you can't do, so you end up going bankrupt. That sucks for you, obviously, because you're bankrupt,but it also sucks for the rest of us because we have to pay not only for your care, but also for all the money the hospital spent trying to get you to pay for your care. Also
the only options available to uninsured people are usually the most expensive options, like emergency rooms, which is just BANANAS. But those inefficiencies are hard to measure. Fortunately,there are things we can measure.So like I said before, because the US is one of the richest countries in the world, youwould expect us to pay a little more for healthcare than most people. The question is, when dowe pay MORE than you would expect us to pay, and that turns out to be pretty interesting.
Let's start with malpractice and so-called "defensive medicine." The idea here is that doctors are scared of huge malpractice suits so they order a lot of unnecessary tests in order to, like, cover their butts. That does contribute to our healthcare costs, like there are more MRI and CT scans in the US than anywhere else. However, there are a bunch of states like Texas that have passed tort reform to limit malpractice suits, and in those states healthcare costs have dropped by an average of a whopping 0.1%. The biggest estimates for the total costs of defensive medicine put it at around 55 billion dollars, which is a lot of money, but only 2% of our total healthcare costs. Another smallish factor: doctors (and to a lesser extent, nurses) are paid more in the US than they are in other countries, and by my possibly-faulty math we end up spending about 75 billion dollars more than you would expect us to there.And then we have the cost of insurance and administration costs, like paperwork and marketing and negotiating prices. That's about 90 billion dollars more than you would expect us to spend. We spend about $100 billion more than you would expect on drugs, not so much because
we take MORE of them, but because the ones we take cost more per pill.
Okay, and now for the big one. I'm gonna lump inpatient and outpatient care together, because
in the US we do a lot of things as outpatient procedures, like gallbladder surgeries, that
are often inpatient procedures in other hospitals. We're just gonna make a big ball.
That big ball is $500 billion more than what you would expect given the size of our economy.
Per year.
Why? Because in the United States we do not negotiate as aggressively as other countries do with
healthcare providers and drug manufacturers and medical device makers. So like in the UK the government goes out to all the people who make artificial hips and says "One of you is going to get to make a crapton of fake hips for everybody who is covered by the NHS here in the United Kingdom. But you better make sure your hips are safe, and you better make sure that they are cheap, because otherwise we're going to give our business to a different company." And then all the fake hip companies are motivated to offer really low prices because it's a really huge contract. Like think if your company got to put hips inside of everyone in England and Scotland and Wales and Northern Ireland (I guess not everyone.Just the people who need hips).
But in the US we don't have any of that centralized negotiation, so we don't have as much leverage.
The only big exception is Medicare, the government-funded healthcare for old people, which, not coincidentally, always gets the lowest prices.So basically,in the United States, providers charge whatever they think they can get away with, and they can get away with a lot, because it's really difficult to put a price on, like, not dying. This is a phenomenon called "inelastic demand," like if you tell me that this drug will save my life costs $7 a month, I will pay you $7 a month for it. If you tell me that it costs $124 a month, I will find a way to find $124 a month to pay for it. You can't negotiate effectively on your own behalf for healthcare services because you NEED them. And not like you need a Macbook Air or the new season of Sherlock, but actual, physical need (I guess it is like the new season of Sherlock).So basically, until and unless we can negotiate as effectively with the people providing healthcare as Australians and British people do, US healthcare costs will continue to rise
faster than anywhere else in the world and we WON'T get better healthcare outcomes. I am so
tired of people offering up simple explanations for what's wrong with our healthcare system.They say "Oh, it's malpractice," or "it's doctors who must also be businesspeople" or it's insurance companies or "it's insane rules for who can GET insurance." It's drug companies, it's government bureaucracy, it's an inability to negotiate prices.
Yes, yes,yes, yes, and YES! It is all of those things and more! It is not a simple problem, there
will not be a simple solution, but it is probably the biggest single drag on the American economy
and it's vital that we grapple with it meaningfully instead of just treating healthcare costs as political theatre.
So I hope I've at least introduced the complexity of the problem.Welcome back to the United States. As you can see, everything is peachy here.Friendly reminder, educational blogs are allowed to be long. All of the people who are commenting about how punished I am, did not read to the end of the blog.I feel dizzy.
Good job. You got most thing right. I will add:
ReplyDelete1. Medicare can't negotiate drug prices, and law forbids reimport of many products by large pharmacy chains, from countries that can. You got ribbed by bribed congressmen, there. Thus, the US has < 5% if the world's population but pays 40% of the world's total drug bills.
2. You missed the point on specialists, who make twice as much as primary care docs, but are far more costly than this suggests. MD salaries are only 20% of the medical dollar. Specialists like cardiologists hurt not so much by what they make, but the cost of the procedures they order.
Good job. You got most thing right. I will add:
ReplyDelete1. Medicare can't negotiate drug prices, and law forbids reimport of many products by large pharmacy chains, from countries that can. You got robbed by bribed congressmen, there. Thus, the US has < 5% of the world's population but pays 40% of the world's total drug bills.
2. You missed the point on specialists, who make twice as much as primary care docs, but are far more costly than this suggests. MD salaries are only 20% of the medical dollar. Specialists like cardiologists hurt the system not so much by what they make, but the cost of the procedures they order to make it.