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Paying the Price

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Paying the Price

Why does America spend so much on health care? March 16, 2022
Health Care
Politics and law

In his two campaigns for the presidency, Bernie Sanders regularly cited a favorite statistic to assail American health care: “In 2015, the United States spent almost $10,000 per person for health care; the Canadians, Germans, French and British spent less than half of that, while guaranteeing health care to everyone.” Furthermore, he noted, “these countries have higher life expectancy rates and lower infant mortality rates than we do.” One need not be a socialist to wonder why Americans spend so much more than other countries on health care. What are we getting for the extra money? And how can we get a better deal?

Americans’ average disposable income exceeds that of almost every other nation, as does their consumption of most goods and services. Health care is no exception. Over the course of the past century, medical capacities have progressed rapidly—and health care has everywhere attracted a disproportionate share of rising incomes. As recently as 1960, a doctor may have recommended bed rest and painkillers to a patient who had suffered a heart attack; but spending money would otherwise have had little ability to change outcomes. Today, cardiologists may contemplate an array of expensive treatment options from bypass surgery to angioplasty and an ever-growing armamentarium of costly drugs.

Recent decades have seen a revolution in surgical, diagnostic, life-support, and pharmaceutical technology, along with an increasing specialization of medical professionals. This has allowed procedures to be performed with greater precision, permitting better outcomes, faster recovery times, and reduced risk of complications. It has also allowed interventions to be undertaken that previously would not have been worth the risk. For instance, the number of Americans having received a total hip replacement surged from 240,000 in 1980 to 2.5 million in 2010, while the number having received a knee replacement rose from 298,000 to 4.7 million.

America’s health-care market regulations and subsidies have been designed to foster such improvements in quality and quantity. Yet much less has been done to ensure that these markets are also structured to put downward pressure on costs.

As employer-sponsored health insurance is exempt from income taxation, nine out of ten privately insured Americans are covered by plans purchased by their employers. Since staff typically live in many different areas, plans must therefore have broad provider networks that include all major hospital systems that employees may use. That allows hospitals and physician groups to insist on inflated fees and generous reimbursement for whatever costs they may incur.

With insurers covering the bulk of treatment costs, patients often opt to receive care from the hospitals with the most prestigious reputations and most expensive amenities, with little regard to price. Such preferences encourage hospitals to spend millions of dollars constantly upgrading facilities to attract physicians and patients alike, a phenomenon known as the “medical arms race.”

Many nations have sought to impede the upward spiral of expenditures associated with third-party payment for medical care by enacting limits on physician fees, regulating hospital capital expenditures, and capping medical expenditures. Sometimes these regulations are loose and make little difference. But single-payer health-care systems, such as in Britain and Canada, have taken this approach to the extreme of making the government responsible for purchasing most medical services for the whole population.

Single-payer has succeeded in restraining total health care spending and has even achieved some forms of efficiency. Because the costliest equipment is much less widely available, it is used much more intensively where it is allowed—and reserved for the purposes where it is most effective. For instance, building a suite with a new MRI machine can cost up to $5 million. Tight restrictions on purchase of such equipment mean that in 2016 each MRI machine was used an average of 5,947 times in Canada, compared with 3,287 times in the U.S. This allowed the average cost of an MRI scan to be much lower in Canada than in the U.S.

Such systems also have downsides, however. Only 56 MRI scans per 1,000 residents were performed in Canada, compared with 121 in the U.S. As a result, the average waiting time for outpatient MRI scans in Ontario was 19 weeks—leaving patients in anxiety and pain while they remain without definitive diagnoses and their medical conditions deteriorate—and that’s if they were able to get an MRI scan at all.

Government regulation of health-care prices is a method of redistributing trade-offs, not a ticket for a free lunch. Because Europeans earn less for high-skilled labor, they may pay doctors less. But a high-wage country like Canada must pay similarly to the U.S. to attract physicians into the profession. Where health-care spending is regulated for aggregate purposes, the decision to prevent the purchase of an extra piece of equipment because it is “inefficient” and the decision not to help a patient with lesser prospects of being restored to health are the product of the same cost-benefit calculus.

Canada’s single-payer system saves funds to make routine care cheaply available by inhibiting the use of the costliest services. The nation has only half as many intensive-care beds per capita as does the U.S. Specialists can be seen only following a referral by a general practitioner, and patients then face waiting times that average four weeks for an oncologist and 21 weeks for an OB/GYN. Operating-room time is particularly tightly controlled, and so patients must wait an average of 26 weeks for neurosurgery. Such waiting lists, while often enough costly in human terms, genuinely do save taxpayers money—some patients get better while they wait, others give up trying to obtain care, and some die before their turn.

Single-payer authorities have similarly tried to save funds for life-saving and emergency procedures by withholding resources from orthopedic care. As the soaring demand for joint replacements has threatened to bust single-payer health-care budgets, waiting lists have risen to an average of 39 weeks. But though long waiting lists for orthopedic surgery may greatly reduce costs without altering life-expectancy statistics, they effectively sentence any 80-year-old who needs a hip replacement to an extended period of house arrest and isolation.

No bright line demarcates medical necessity from waste. Health care exists on a spectrum of cost-effectiveness: from antibiotics, which are cheap and highly effective, to hit-and-miss cancer therapies, some of which cost over $100,000 for a course of treatment but extend life by an average of only a few months. Diminishing returns mean that the less a health-care system does, the more value it will get out of each dollar. But that does not imply that the best health-care system is one that pays only for antibiotics.

Drug prices are everywhere determined by the willingness of insurers or governments to pay for them—which depends, in turn, on their willingness to walk away if they deem the price too high. For existing therapies, which have many cheap generic substitutes (the case for 90 percent of all drugs consumed), this is easy, and prices remain low. But for valuable new drugs, for which no alternative previously existed, a trade-off is necessary. Single-payer health-care systems typically set cost-effectiveness thresholds above which they refuse to pay for drugs. (For instance, Britain’s National Health Service refuses to cover therapies that cost more than $40,000 per year of life saved.) This helps drive down prices but often leaves patients needing to pay the full amount out of pocket for those that aren’t covered. As a result, levels of out-of-pocket spending on prescription drugs in most countries are higher than in the U.S.

Though its excessive costs deserve criticism, the stinginess of American health care has regularly been exaggerated. Whereas universal health-care systems cover everyone in theory but often fall short in practice, American health care offers no universal guarantees but in practice makes available all kinds of assistance to people who can’t provide for themselves.

As a result, Americans pay a smaller share of household consumption (2.5 percent) on out-of-pocket medical payments than the OECD average (3.0 percent). The 0.8 percent of the U.S. population bearing catastrophic medical expenses (i.e., those exceeding 25 percent of annual personal consumption) in 2013 was only slightly higher than that in Britain and Canada (0.5 percent) but much less than in Spain (1.8 percent) or Switzerland (6.7 percent). The portion of Americans facing catastrophic expenses has likely since been further reduced by the Affordable Care Act’s 2014 expansion of Medicaid.

Though American health care is often characterized as a small-government approach, its willingness to spend lavishly extends to the public sector. In 2017, per capita government spending on health care in the U.S. ($4,885) was higher than it was in Canada ($3,439). But while these public funds were stretched across the entire population in Canada, resulting in shortfalls in access to care, Medicaid and Medicare focus on the 34 percent of the population that is poor or elderly and less able to pay for themselves. As a result, the 82 million low-income Americans covered by Medicaid in 2019 paid no premiums, deductibles, or coinsurance, but enjoyed comprehensive access to doctors, hospitals, and newly developed prescription drugs.

Americans consume so much health care in large part because they need it more. Rates of heart disease and cancer are more than twice as high in the U.S. as in Europe, and the incidence of lung disease, strokes, and diabetes is 50 percent to 80 percent higher than in Europe. In 2019, 43 percent of Americans were obese, compared with 28 percent of Brits, 24 percent of Canadians, 17 percent of French, and only 5 percent of Japanese. The burden of these conditions is multiplicative and increases the risk of death following heart attacks, strokes, and Covid-19 several times over—along with that of complications from surgical procedures.

Health care is a business of damage mitigation. Even the best medical care won’t make a sick person healthier than someone who never fell ill to begin with. It is therefore very difficult to compare the comprehensive effects of health-care systems on medical outcomes in a way that appropriately controls for differences between patients. Utahns enjoy longer average life expectancy than Vermonters, despite spending half as much per person on health care, just as Canada does the U.S. But that does not mean that Utah’s health care system is necessarily better than Vermont’s.

Survival rates following cancer, heart attacks, or strokes do seem to be higher in the U.S. than in other developed nations, despite American patients’ greater comorbidities. Some scholars argue that these differences may merely reflect higher rates of diagnosis and tend to wane over time. Nonetheless, disparities in access and use of specialty care, diagnostics, newly-developed drugs, and surgical procedures seem clear and beyond dispute. Even their advocates admit that single-payer systems are in continual crisis due to underfunding.

The strength of American health care is that it has accommodated the desire of an affluent population for ever-greater access to pathbreaking medical technology. But the collective purchase of medical care by employers has meant that costs have often spiraled unaccountably and been imposed on all—many of whom may have less willingness or ability to pay. Staff understandably resist effective cost controls being included in their health insurance benefits when savings will go to their employers, rather than to themselves.

Free enterprise is generally popular in America because it allows individuals control over their lives. But Americans must switch health-care plans for reasons known only to their human-resources departments, lose access to coverage when their employment circumstances change, and have little capacity to shop around for alternatives that offer them a better deal. With little choice, they find themselves trapped in plans that are often unresponsive and incomprehensible. This has helped make American health care unpopular with voters from all sides of the political spectrum.

Both Democrats and Republicans acknowledge the shortcomings of American health care. Both have been burned by attempts to reform it over recent years. Throwing more money at an inefficient and unaccountable system thus seems like the only politically safe path. Yet what Americans really need is more individual control over their coverage—and making it easier for them to switch to plans that genuinely try to drive down costs might even save them money, too.

Photo: bymuratdeniz/iStock

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