Why is healthcare so expensive in the USA?

Question

I find this phenomenon to be kind of puzzling.

USA is one of the countries with one of the highest purchasing powers in the world, yet when it comes to healthcare an standard US citizen is likely to not be able to afford it if what needs to be dealt with is something not too simple.

For example this graph, based on OECD data, clearly shows that the USA is an outlier when it comes to healthcare spending: It spends almost twice as much per capita as other comparably affluent countries.

I can understand that as an essential service prices may skyrocket if the market is left without regulation but... essential goods like housing and food are by no means comparable with healthcare costs in general (for this question I'm setting as time frame last 10 years).

What are the reasons healthcare costs are so skyrocketed in the USA?

Answer 1

There are several reasons for that, following Papanicolas et al (2018):

1. High regulatory and administrative burden. US has one of the highest regulatory and administrative burdens. US healthcare market might be unregulated in terms of prices and range of services and procedures you can get but it is actually quite heavily regulated when it comes to licensing, building codes etc. in addition, US does not have unified administration system for insurance which also creates a lot of admin costs.

2. High costs of pharmaceuticals (drugs) and medical equipment.

3. High labor costs. This is actually one of the more important reasons since US medical labor costs are extremely high. US doctors and nurses are payed much more than in many other advanced countries.

These are one of the primary reasons listed in literature, there are also some other issues that contribute to this, such as excessive testing due to US being very litigious country and hospitals wanting to avoid liability (see Brateanu et al 2014). A serious concern is also high market concentration in healthcare industry making it not very competitive which is also a reason why prices are very high (see Reinhardt et al 2004).

Answer 2

In Milton Friedman's view, the cost of health care in the USA is high because consumers don't pay for it directly, and the people paying don't directly care whether it's a good value for the money spent. Consumers pay premiums driven by average costs but pay little of the marginal cost of their health care. Insurers don't care much about reducing costs because they can be passed on in the premiums. Consumers, who are already overpaying, don't have much incentive to make their individual usage more efficient, so costs continue to rise.

Other developed countries may share the feature that consumers don't pay for health care directly, but there is some more straightforward cost control in the form of single payer or other universal coverage. The centralized administrator has more negotiating power with providers, and can impose rationing on consumers; at the same time, there is political pressure not to raise premiums (which often take the form of taxes). So such an administrator is more likely to keep costs down.

Answer 3

It may not explain the entire difference, but GDP isn't a very good way to compare the amount of income that residents of different countries might spend on healthcare for a number of reasons. Usually this has to do with the structure of the economy, but GDP can also be distorted by high trade deficits, the effects of international tax avoidance, or specific political situations. With a better-motivated x-axis, the US looks less like an outlier:

The idea is that AIC/c better predicts healthcare spending because it's a proxy for the total amount of (macroeconomic) income within the system available to spend on healthcare.

This isn't to say that American healthcare isn't expensive in an absolute sense—it's both a large fraction spending, and the most expensive in the world. So it's probably less useful to look just at factors that are unique to the American system and see it more as an extreme example of a global phenomenon.