Why does the US spend so much on health care?

A review of a 2019 Health Affairs research paper

The 2019 article "It's Still The Prices, Stupid: Why The US Spends So Much On Health Care, And A Tribute To Uwe Reinhardt" provides an updated analysis of why health care costs in the United States remain significantly higher than in other developed nations. Written by Gerard F. Anderson, Peter Hussey, and Varduhi Petrosyan, this work revisits their landmark 2003 paper co-authored with the late Uwe Reinhardt, which identified high prices as the primary driver of excessive US health care spending.

While this may seem like a big “duh!” to you, this article discusses how it is not that the US provides more care in terms of volume, but rather the prices so far outweigh those of other countries with comparable volume that we spend a much greater amount per capita.

This is still true in 2024.

Key Findings: The Price Problem Persists

Despite fifteen years of health policy reforms and restructuring efforts, the central conclusion remains unchanged: prices, not utilization or resources, continue to be the primary reason why the US spends far more on health care than other OECD (Organization for Economic Cooperation and Development) countries.

The 2016 data used in the paper reveals that US per capita health spending reached $9,892—25% higher than Switzerland (the second-highest spender at $7,919) and 145% higher than the OECD median of $4,033. This translates to a staggering 17.2% of US GDP devoted to health care, compared to the OECD median of 8.9%.

This finding is not that interesting in and of itself. Everyone knows that health care in America is expensive. However, this paper gets more interesting when you look at the magnitude of the resource utilization differences.

American Health Care Resource Utilization is Much Lower than other OECD Countries

Perhaps surprisingly, the US continues to deploy fewer health care resources per capita than most OECD countries:

• Hospital beds: 26% fewer acute care beds per 1,000 population (2.5 vs. 3.4 OECD median). 26%!

• Physicians: 19% fewer practicing physicians per 1,000 population (2.6 vs. 3.2 OECD median)

• Nurses: 20% fewer practicing nurses per 1,000 population (7.9 vs. 9.9 OECD median)

• Hospital stays: Shorter average lengths of stay (5.5 days vs. 6.2 OECD median)

These statistics directly counter the notion that Americans simply use more health care services. Rather, the US is actually utilizing fewer resources while paying substantially more for them.

The Growing Public-Private Divide

A significant development since the original study is the widening gap between what public and private insurers pay for health care services. In 2000, the differential was approximately 10%, but by the time of this study, the Medicare Payment Advisory Commission (MedPAC) estimated that private insurers were paying prices 50% higher than Medicare for the same services.

This suggests that while government programs like Medicare have been somewhat effective at controlling costs through their bargaining power, the private insurance market has been largely unsuccessful at restraining price growth. Part of this is due to new medical technologies and part of this may be due to market consolidation in the provider space. However, profit motive in the US health care market is also a significant contributor unlike in other countries.

I wrote a previous article about the health conditions that contribute the most to US health spending:

What conditions contribute the most to U.S. health care spending?

Pharmaceutical Spending

The US leads the OECD in pharmaceutical spending, with per capita spending of $1,011 in 2015—more than double the OECD median of $422. Between 2000 and 2015, US pharmaceutical spending grew at an annual rate of 3.8%, significantly outpacing the OECD median growth rate of 1.1%.

Studies referenced in the article indicate that high prices for brand-name pharmaceuticals, rather than volume, account for most of this differential, with the US effectively subsidizing pharmaceutical company profits globally. The argument for the high prices from the biotechnology and pharmaceutical industry is that research and development is expensive. In the absence of price regulation or negotiating power, Americans will, of course, pay any price for a life saving drug.

Medical Technology

While the US has historically led in the adoption of advanced medical technologies like MRI units and CT scanners, other OECD countries have been catching up. By 2015, the US ranked second in MRI units per million population (behind Japan) and third in CT scanners per million population (behind Japan and Australia).

Notably, Japan maintains high technology adoption while keeping overall spending low through strict price controls, capturing negotiated savings in subsequent years' payment rates, and adjusting payments when service volumes increase to prevent overuse.

Administrative Costs

Administrative efficiency is a major area where the US lags behind other developed nations. According to the Commonwealth Fund's "Mirror, Mirror 2024" report, administrative complexity places a significant burden on the US health care system. The report finds that physicians and patients in the US face substantial hurdles related to insurance rules, billing disputes, and reporting requirements. Switzerland and the US performed poorly on most administrative efficiency measures, ranking last and second-to-last respectively.

The report highlights how the US system's fragmentation creates inefficiency - with thousands of health plans, each having different cost-sharing requirements and coverage limitations, physicians and other health care providers spend enormous time and effort billing insurers. Insurance denials are also common, requiring burdensome appeals by both providers and patients. By contrast, countries like Australia and the United Kingdom excel in administrative efficiency by minimizing payment and billing burdens through streamlined systems. In the UK, health care services are free at the point of care, eliminating the need for physicians to bill patients or the government directly for each service.

Market Consolidation and Prices

The article examines how market dynamics affect health care prices in the US. Evidence suggests that consolidation among both providers (hospitals and physician groups) and insurers has strengthened their respective market power without benefiting consumers through lower prices or improved health outcomes.

When providers consolidate, prices tend to rise. When insurers consolidate, the evidence suggests that this mainly shifts profits from providers to insurers rather than lowering premiums or out-of-pocket costs for patients. Meanwhile, other OECD countries typically operate with either a single purchaser or coordinated payment rates across all purchasers, avoiding these market power issues.

The US Federal Trade Commission and state attorneys general have the power to block consolidation in many circumstances, but the hospital and health care environment is tricky as many hospitals are non-profits and the alternative to consolidation in many cases is the closure of a needed hospital facility. Thus, in other countries, this is handled via single payor regulation.

If Not the Prices, then What Else?

The authors address several alternative explanations for high US health care spending:

1. Higher ability to pay: Some argue that wealthier countries naturally spend more on health care. However, the US remains an outlier even after adjusting for ability to pay.

2. Service intensity rather than prices: While difficult to directly compare across countries, the authors note that for identical products like brand-name pharmaceuticals, the price differential cannot be explained by intensity.

3. Defensive medicine: While the US does have more malpractice claims per capita than comparable countries, a higher percentage of US claims are dismissed, and average payments per settlement are often lower than in countries like the UK and Canada.

The authors conclude that fifteen years after their original analysis, prices remain the primary driver of high US health care spending. What has changed is the widening differential between what public and private insurers pay.

This suggests that future cost containment efforts should focus particularly on addressing the high prices paid in the private sector, where market failures have allowed costs to grow virtually unchecked despite numerous reforms.

Market failure, monopoly, and an unwillingness to sacrifice access to new technologies are significant drivers of American health care spending. Politically, Americans continue to sacrifice a better system in favor of widely held political narratives around so-called socialized health care and wait-times.

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