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?

  • 13
    $\begingroup$ @acpilot untrue, my family is essentially uninsurable outside of employer-sponsored plans, and my wife and I make well above the median income. While I don't disagree that the problem is frequently exaggerated as a rhetorical ploy I'm inclined to say that intuition is probably flawed, and the statistics are probably correct. $\endgroup$ – Jared Smith Jun 21 at 1:32
  • 17
    $\begingroup$ @acpilot If you take, for example, Australia - which has similar per capita income - you would find that the per capita cost of health care is far less than the US. This is similar across other developed nations (see e.g. Health expenditure and financing, per capita, 1970 to 2015) and thus the OP is asking the very valid question of "why?". $\endgroup$ – epiliam Jun 21 at 5:03
  • 6
    $\begingroup$ @acpilot I'm not sure if you live in the US, but if you do, I expect you have a full-time job with an employer with a health care plan that you participate in. You also might be single. Unless you have a quality plan through your employer, health insurance will cost a significant portion of your income in the US. And that's just the insurance, which does not pay for all of your health expenses. I was insured when I broke my foot and also when I was taken by ambulance to the emergency room. Both events cost me more than a month's rent after insurance. And I'm firmly middle-class. $\endgroup$ – Todd Wilcox Jun 21 at 7:56
  • 7
    $\begingroup$ See this fantastic answer on Politics.SE to answer your question. TL;DR the healthcare market is not free by any measure. $\endgroup$ – JonathanReez Jun 21 at 9:35
  • 11
    $\begingroup$ @acpilot "Affordable" is irrelevant to the question (aside from the dispute about your assertion). The question is "why does healthcare in the US cost more than elsewhere" not "is healthcare affordable." $\endgroup$ – alephzero Jun 21 at 11:01

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).

  • 10
    $\begingroup$ I was skeptical about the labor cost, but indeed apparently US doctors make around 200k/annum while other top rich countries only pay 80k to 150k. But what about nurses and other not quite so qualified personnel? Are they really paid that well in the USA? $\endgroup$ – Nobody Jun 20 at 13:44
  • 8
    $\begingroup$ @Nobody yes according to OECD 2017 report on nurses renumeration, the nurse pay in the US is second highest from all OECD countries, only Luxembourg has higher costs. In US on average nurse earns about 76k in Germany only about 54K (this is already PPP adjusted), see the report here oecd-ilibrary.org/social-issues-migration-health/… This is also not a recent phenomenon, I recall this held already in 2010s (pay was of course different but US was 2nd already back then and the difference between US GER was even back then about 20-30k) $\endgroup$ – 1muflon1 Jun 20 at 13:53
  • 4
    $\begingroup$ Is remuneration really the same as labour cost? E.g. the German employer pays fifty percent of the nurses health insurance, part of social security contributions, and a few other things (adding some 22% to the actual cost of the employee). Not sure how other countries handle this (e.g. I was under the impression that in the US health insurance if often bought directly by the employee). Is this already factored in in the OECD table? $\endgroup$ – Eike Pierstorff Jun 20 at 20:41
  • 7
    $\begingroup$ @EikePierstorff According to the OECD document remuneration is defined as gross wage plus all benefits, so it includes taxes and social contributions. It might not include 100% of all labor costs because I do not think they fully taken into account such hard to measure benefits such as working in safe and pleasant environment which are very hard enumerate, but it should be a reasonably good proxy for labor costs. To put it bluntly, I seen remuneration used in peer reviewed research as stand in for labor costs before $\endgroup$ – 1muflon1 Jun 20 at 20:47
  • 7
    $\begingroup$ @MawgsaysreinstateMonica There are a lot of exceptions in practice. Really, so many exceptions that capitalist theory kind of only works on paper. In healthcare in the US, there really isn't competition in any meaningful sense. First, we choose the closest hospital when we need one and we choose the doctor we are most comfortable with. We do not compare prices. Also, we do not see prices. Partly we don't ask, but also because when we do ask, it's very hard to get an answer. Basically health care is not capitalist in the US. $\endgroup$ – Todd Wilcox Jun 21 at 7:49

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.

  • 7
    $\begingroup$ This does not address why there is a difference between the healthcare costs of the US and of other developed countries. $\endgroup$ – Giskard Jun 21 at 7:04
  • 8
    $\begingroup$ @Giskard In other developed countries, the people who pay for it directly do care whether it's a good value for the money spent. $\endgroup$ – Todd Wilcox Jun 21 at 8:06
  • 9
    $\begingroup$ @nanoman: In Germany, I don't "see" the true costs of any of the medical services. I pay a 10€ fee for any prescription, no matter if the medicine itself costs 50€ or 500€ per package. I have no idea what it costs the insurance company when I visit the doctor, nor do I care. I 've had several examinations in the last year that had to be done under general anesthetic at the local hospital - I have no idea what those examinations cost, and I will never see a bill for them - the insurance takes care of that. Despite this, the total cost per person in Germany is lower than in the US. $\endgroup$ – JRE Jun 21 at 8:07
  • 13
    $\begingroup$ @JRE The fact that you don't care what it costs the insurance company is one reason why costs are lower. In the German system, the insurance company has to pay the whole bill, and can't pass any costs on to the patient. This gives the insurance company a lot of motivation to fight for lower costs - which is not as true in the US. In the US system, the insurance companies have little motivation to compare costs. $\endgroup$ – Todd Wilcox Jun 21 at 8:14
  • 6
    $\begingroup$ This effect can be readily seen, by looking at the opposite scenario, that of healthcare that is not typically covered by insurance. For instance, LASIK surgery in the US has continually decreased in price, while the convenience and comfort provided to the customer has increased. This is because patients are paying with there own hard earned dollars and providers are competing for them. $\endgroup$ – Glen Yates Jun 21 at 18:25

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:

Heath spending vs AIC

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.

  • 6
    $\begingroup$ Continuing that curve off the right end of the chart, a country where the average annual consumption is about 110k USD is expected to spend 100% of its income on healthcare (going above 100% for >110k). We also see the reverse if you disaggregate the USA into income tiers: the poor spend more money on healthcare than the rich. So this is rather problematic for several reasons. $\endgroup$ – JounceCracklePop Jun 21 at 21:55
  • 3
    $\begingroup$ @Dan : Many thanks for the link(s). What a treasure trove of information on an area full of misconceptions! I spent hours reading this, and will spend more time with it. $\endgroup$ – Aganju Jun 22 at 3:45
  • $\begingroup$ @JounceCracklePop Healthcare workers are highly educated professionals who nevertheless are very limited in how many patients they can treat each day. The US has the second highest wages for them, which has a fair contribution to health costs in the US - in most of the world, healthcare workers tend to be rather underpaid. Even then, when you look at the cost and quality of health services not covered by insurance (i.e. paid for by the actual patient), the US is at the top - when the incentives aren't distorted, quality goes up and price goes down. $\endgroup$ – Luaan Jun 22 at 6:52
  • $\begingroup$ @JounceCracklePop Good point; I've clarified in the answer that it's about total (macroeconomic) income in the system rather than individual income. Different ways of distributing the costs to individuals then make the result more or less fair. The Swiss system is an extreme example where healthcare is ~$300/month for everyone, which is very fair to sick people and very unfair to poor people. $\endgroup$ – Dan Jun 22 at 9:55

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.