Why Is American Healthcare So Expensive?

 

The U.S. spends almost 18% of GDP on healthcare costs, double what any other developed county spends.
CaptureThere are many reasons for our excessive healthcare spending.  For example:

  • As illustrated in the above chart, many medical procedures are far more expensive here than in other countries.
  • Profit levels in the healthcare industry are often very high, for example: 16.4% for pharmaceuticals, health-care information 9.4%, home healthcare firms 8.5%, medical labs 8.2% and generic drug makers 6.5%.
  • Health insurers, on the contrary, have a very low profit margin, (2.2% in 2009), and so can hardly be blamed for the high cost of healthcare.

The Affordable Care Act greatly expands access to healthcare but does very little to control costs.  The Manhattan Institute’s Avik Roy has outlined a plan, “Transcending Obamacare: A Patient Centered Plan for Near-Universal Coverage and Permanent Solvency” which would reform Obamacare by making it more like two very successful and low cost consumer-driven plans, those in Switzerland and Singapore.
These two countries feature government sponsored health savings accounts, backed up by insurance for catastrophic care.  What happens is that out-of-pocket spending for healthcare per individual is higher in Switzerland and Singapore than it is in the U.S., as indicated in the chart below.
Capture1In other words, the real reason for our high cost of healthcare is that Americans don’t have enough “skin in the game.”  We have very little incentive to hold down the cost of our own care because it is mostly paid for by third party insurance companies.
As the cost of healthcare continues to climb, such changes are already beginning to creep into the health insurance market place.  Private companies are raising the deductibles on the insurance plans which they subsidize.  The bronze, silver, gold and platinum plans on the ACA exchanges differ largely by the level of the insurance deductible.
Avik Roy’s plan referred to above in essence speeds up the process of converting the ACA into an efficient, consumer-driven healthcare system by making it more flexible and therefore more adaptable to market forces.

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