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Why Healthcare Is So Expensive

The following are primary reasons why healthcare is so expensive.

 

Administrative Costs

  • About 25-30% of healthcare cost is associated with administration.  Administrative personnel accounting for about 30% of the health care workforce.
  • Administrative costs include administration personnel (CEOs and staff), insurance related costs, billing costs, scheduling and medical records management.

Solutions:

  • Eliminate the need for insurance companies and complex billing.  A simplified financing system that doesn’t rely on insurance companies and complex billing codes has been estimated to result in cost savings exceeding $350 billion annually, nearly 15% of health care spending.  However, this would likely lead to significant administrative job losses.
  • One benefit to having a single payer system would be the reduced administrative costs, although single payer does come with other problems.
  • Newer payment models, such as direct primary care and concierge medicine, use a flat monthly fee directly from patients to providers to eliminate many of the administrative middleman costs.

 

Healthcare Charges

  • Healthcare charges are far higher than they should be for everything – doctor visits, procedures, hospital admissions, surgeries, medical supplies, etc…
  • Some high charges are due to making up costs lost in other areas (Ex. uninsured patients), however most of the high charges are due to market power and lack of transparency.

Solutions:

  • Cost transparency.  Sites like Healthcare Price Tag and many insurance company websites publish costs and charges for many healthcare services.  Since the trend is for more healthcare costs to be transferred on to patients, it is important to compare costs prior to any needed services when possible.
  • Consolidation in healthcare (hospital mergers) results in reduced competition and higher market power which raises costs.  Either costs need to be regulated or consolidation needs to be prevented.
  • Healthcare is a profit driven business that will migrate healthcare services to the most profitable outcomes.  As an example, hospitals are increasingly buying out physician practices and making doctors employees.  This allows them to perform their services in the hospital and charge an extra “facility fee”.  Ex. A cardiologist in a private office may charge $189 for an EKG, but the same cardiologist performing the same EKG in a hospital owned facility is able to charge $453.  You get the same service, but pay more.  To save money, do not get any elective service in a hospital or eliminate the facility fee.

 

Drug Costs

  • Drug manufacturers blame high prices on research costs, government regulations and shareholder expectations for high profit margins.
  • The primary reason is because of market power – they charge higher because they can get insurance companies, the government and patients to pay those prices.

Solutions:

  • When Congress created Medicare Part D, it specifically denied Medicare the right to use its power to negotiate drug prices.  Medicare needs to be allowed the freedom to negotiate the best prices possible for recipients.
  • A mix of laws force insurers to include essentially all expensive drugs in their policies.  Other countries that do not require this are able to say no to a handful of drugs each year, usually those that are both ineffective and highly costly. If we were to give insurance companies the freedom to say no to some drugs, it would force drug companies to offer their drugs at prices that make them attractive.

 

Increased Utilization

  • Much of healthcare operates on a “Fee for Service” model.  The more services provided, the more the system gets paid.
  • Defensive medicine, where providers order more tests and procedures out of fear of potential lawsuits, is estimated to account for $650 billion in expenses

Solutions:

  • Changing Fee for service to a value based, bundled or capitated model where providers are paid a set amount would reduce utilization.  However, this has been tried in many forms – Health maintenance organizations (HMOs), Accountable Care Organizations (ACOs), Medicare DRG Payments to name a few and all of these alternatives have their own limitations, namely reduced healthcare services.
  • State laws and medical practice patterns differ in various states.  Common sense tort reforms such as a statute of limitations for claims, provisions that only those individuals who cause harm should pay and a cap on non-economic damages have been shown in some states like Texas to attract physicians and reduce malpractice premiums.

 

Why Healthcare is so expensive
Why Healthcare is so expensive

The Bottom Line

Why is healthcare so expensive?  The simple answer is because there is a lot of money available to pay for it.  

Whenever money is available to pay for something, a system will migrate toward a way to collect that money.  Much of the costs, charges, fees and complexity in healthcare has been developed to try to collect as much of the trillions of dollars available for healthcare as possible.

To truly reduce the expense of healthcare, the money has to dry up.  Depending on who you believe, people will argue this can be accomplished through a variety of ways including:

  • More government regulation of prices
  • Increased competition by increasing the supply of doctors and hospitals
  • Less government subsidies
  • Increased cost transparency
  • Reduced reliance on insurance companies
  • Tort reforms
  • Reduced fee for service models eliminating the profit motive of healthcare

These solutions will likely have other consequences – hospital closures, job losses, reduced healthcare services, but the reality is many of these extra services, facilities and jobs were created not necessarily to improve healthcare, but to collect the money available for healthcare.

 

References:

  1. Why does health care cost so much in America? Ask Harvard’s David Cutler
  2. Billing and insurance-related administrative costs in United States’ health care: synthesis of micro-costing evidence 
  3. Why Drugs Cost So Much
  4. Should the U.S. Move Away From Fee-for-Service Medicine?
  5. BRIEF: Medical Tort Reform
  6. 6 Reasons Healthcare Is So Expensive in the U.S.
  7. Direct primary care, a no-insurance healthcare model
  8. How Government Regulations Made Healthcare So Expensive