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Why Does Health Care Cost So Much?
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Why Does Health Care Cost So Much?


By and large, current efforts in Congress to enact health care reform are focused on expanding access to health insurance, not on containing health care costs. But cost is the motivation for much, if not most, of healthcare reform. It is helpful to understand why costs are so high and increasing at such a rate in the United States, what cost containment measures are being debated in Congress as part of health reform, and what other measures might help to control health care spending.

If medical inflation continues at the same rate as it has over the last 10 years, the average annual premium for family insurance in 10 years will exceed $30,000.

How Expensive is Health Care in the United States?
The U.S. annually spends around 16% of its GDP on health care; the next highest− spending country is France, which spends 11% of GDP.(1) On a per capita basis, the U.S. annually spends more than $7,000 per person; Norway, the next highest−spending country, only spends $4,700. Between 1995 and 2005, the average annual increase in per capita health care expenditures in the United States was 3.8%; in Canada during the same period, it was only 3.2% and in Germany, only 1.8%.(2) If medical inflation continues at the same rate as it has over the last 10 years, the average annual premium for family insurance in 10 years will exceed $30,000.(3)

Why Does Health Care Cost So Much? The Mistaken Explanations
There are a number of reasons behind the high cost of health care in the U.S. Before we discuss them, let’s consider several flawed explanations.

The U.S. population is aging, and this is an important cause of the rising cost of health care. The Congressional Budget Office projects that between now and 2035, aging will account for the greatest share of health care inflation in the Medicare and Medicaid programs.(4) But other countries with lower health care spending have been aging much more rapidly; in the U.S., 12.6% of the population is over 65, while the figure in Europe is 16.7%.(5) The aging of the population explains why costs are rising, but not why costs in the U.S. are rising faster than in the rest of the world.

Per Capita GDP
The U.S. is a wealthy country, and it might be supposed that this helps explain why health care costs so much. But a number of countries with lower health care costs have higher per capita GDPs, and based on per capita GDP alone, the U.S. spends $2,500 more than it should on health care.(6)

Better Outcomes
Is the high cost of care in the U.S. justified by the health of its citizens? In other words, although we spend more, do we get more in terms of health? The answer is complicated; the U.S. has better statistics for some health care services, such as cancer care, and we have shorter waiting times than many other countries. But we do not score that well on a number of parameters, including infant mortality, coordination of chronic care, life expectancy, and avoiding preventable mortality and morbidity.(7)

Medical Malpractice System
In 2004, the Congressional Budget Office (CBO) estimated that the entire cost of the malpractice system accounted for only about 2% of the overall costs of health care.(8) While malpractice crises, characterized chiefly by sudden, dramatic increases in malpractice insurance premiums, stress physicians and other health care providers, the economic impact on the health care system as a whole appears to be slight. To counter this, the American Medical Association and other medical organizations asserted that the CBO ignored the cost of “defensive medicine,” which accounted for as much as $120 billion a year in health care costs.(9) This contention was disputed on a number of grounds, not the least of which was that it was virtually impossible to determine what medical practices were “defensive.”

In October 2009, the CBO released a report that found that malpractice reforms would reduce health care spending by more than $40 billion over the next 10 years.(10) This is far lower than the figures for defensive medicine that had been put forward by organized medicine, and would save only about 1/10 of 1 percent of current annual health care expenditures. More importantly, the CBO report does not necessarily support the idea that malpractice reforms reduce defensive medicine, defined as practices that do not produce overall patient benefit. One of the three recent studies that the CBO relied on stated:

Our estimates do not imply that any change in spending was necessarily “defensive medicine.” To the extent that additional malpractice costs mean greater precautionary testing with some medical value, any additional procedures might be protective of patient health or valued regardless of their therapeutic properties. We did not find that higher malpractice liability costs were associated with reductions in total or disease−specific mortality. This evidence is clearly not sufficient to rule out a potential benefit from malpractice liability–induced medical spending, but there is also some evidence from other studies that the increases in use associated with malpractice liability costs could actually lead to harm.(11)

A second recent study was more unequivocal: “On the other side of the ledger, malpractice liability leads to modest reductions in patient mortality; the value of these more than likely exceeds the cost impacts of malpractice liability.”(12) (The third study did not assess the impact of reforms on patients’ health.)(13)

If aging, wealth, better outcomes, and malpractice costs do not explain the high cost of U.S. health care, what does?

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Readers Comments
(6) Comments have been made

Howard Green
I appreciate this excellent and informative article. My spouse is a physician and we talk about this subject on a daily basis. As mentioned above, medical malpractice insurance is a contributor. The cost of malpractice insurance is astronomical. Along those lines, we need tort reform because frivolous lawsuits are hurting patients and physicians alike. Malpractice insurance does have it's place when the obvious occurs, but there is no reason for false claims. Cost transparency will help consumers find quality & the most affordable healthcare because they can shop around. We were shocked to find a huge price difference when our son broke some toes and needed an MRI. The prices ranged from $500 to $1,500 for the same service. That is just shameful and it hurts the healthcare consumer who wouldn't know there are more affordable options out there and perhaps could save 100s of dollars by driving a few miles to another provider. We were so struck by the price disparity for the same healthcare service that we decided to start: Hoop Healthcare out of pocket.
Posted Mon, Dec. 1, 2014 at 11:19 am EST
john thomas LSW cincinnati
Excellent article. This should be required reading by all. I have found that people are reluctant to get into a discussion because of the political implications of health care cost. Physicians refuse to comment and begin sounding like politicians themselves for fear of offending someone or just play stupid. Everybody has a duty to inform themselves on these issues and to voice their opinion to their congressman if no one else.
Posted Fri, Aug. 22, 2014 at 8:09 am EDT
Excellent article. There is no fix in the future Just don't get sick for now.
Posted Wed, Dec. 11, 2013 at 5:03 pm EST
Steve Yun
medicine roxx dats y evrything is sooooooooooo xpensive docs luv $$$
Posted Wed, Aug. 7, 2013 at 4:10 am EDT
1. It is consumer driven care. They want stuff done even if the benefit is only 1%. Risks and benefits can be provided, but saying it won't be done because it doesn't have 99% efficacy means being sued upon death or whatever. Defensive medicine is present for almost every patient's decision because guidelines are not absolute, which all lawyers ignore to get cash out of the settlement. You are all leeches! 2. Europe pays for their smartfolk to go to school. They don't pay $1000-1500 per month for the next 15 years while their counterparts have already been working for 5 years. Opportunity cost is huge. Good luck with paying physicians less and keeping the quality. Maybe you'll import them from other countries and then complain about the language barrier. 3. Physician services are being lumped with all the middlemen and that's disingenuous. For example, a physicians reimbursement for a basic procedure is $65 while the cost on the bill is over $2000. Who is getting that $1935 cut minus other ancillary folk? Useless business managers who sit in meetings all day, lawyers creating laws and then striking down or defending them for 20% commission, or some dimwit sales rep smiling and cheerleadering. Medical industry is inflated with a lot of useless folk. 4. Americans are fat. Period. How about denying healthcare to those who inflict greater risk upon themselves? Letting them participate in health insurance is like having auto insurance for alcoholics. Nobody has the guts to send them to the streets or keep it real because we all are now about telling everybody they're special. 5. And finally, are Americans willing to take a lifestyle hit because the Chinese and Indians are showing them up? How about they live at $30K per year level like my parents and stop complaining? Oh no, we deserve cable TV, smartphone, 2 cars, and nice designer clothes.
Posted Wed, Jul. 18, 2012 at 4:34 pm EDT
Jerry Okamura
You cannot solve the cost problem with healthcare without reducing the influence medical inflation has on the rising cost of healthcare. You cannot reduce the medical inflation rate without returning the rationing decision back to where it belongs to the user of the service. You cannot return the rationing decision to the user of the service, if the user of the service is not the one paying for the service. It is as simple as that.
Posted Fri, Feb. 26, 2010 at 2:50 pm EST

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