Co$t of Health in America

Co$t of Health

Health care costs have been on the rise for decades. Expenditures on health care in the United States surpassed $2.3 trillion in 2008, more than three times the $714 billion spent in 1990, and over eight times the $253 billion spent in 1980. Prior to the advent of Medicare and Medicaid in 1965, health care spending never exceeded 6 percent of Gross Domestic Product (GDP). In 2008, U.S. health care spending was about $7,681 per resident and accounted for 16.2% of the nation’s Gross Domestic Product (GDP); this is among the highest of all industrialized countries. Total health care expenditures grew at an annual rate of 4.4 percent in 2008, a slower rate than recent years, yet still outpacing inflation and the growth in national income. Health insurance is becoming increasingly difficult for workers and their employers to afford. Premiums increased 114 percent between 1999 and 2007, while workers’ earnings increased only 27 percent.

Health care cost per person, per year on left, life expectancy on right

The conventional wisdom about skyrocketing healthcare costs tends to blame someone: patients who demand too much care, doctors who practice defensive medicine, aging boomers, and the insurance companies. However, according to a report conducted by the Center for Studying Health System Change (HSC) titled “High and Rising Health Care Costs: Demystifying Health Care Spending.”, TECHNOLOGY, not demographics or medical malpractice, is the key driver of health spending, accounting for an estimated half to two-thirds of spending growth. Paul Ginsburg, the report’s author states, “Technological change (equipment, devices, drugs, tests, and procedures) is the most important factor.” Other important drivers of health care spending include health status of Americans and low productivity gains in the health care sector. While improved technology has improved efficiency in many sectors of the economy, when it comes to healthcare, technological advances are associated with lower productivity.

Advancing technology may have a particularly large impact on spending in the United States because of requirements that effectiveness be demonstrated before technologies are used broadly. It costs about $800 million to create and develop a new drug, says the Pharmaceutical Research and Manufacturers of America.

The U.S. Population pays significantly more than other nations for the same products and services. Prescription drug prices in the United States are the highest in the world. The prices Americans pay for prescription drugs, which are far higher than those paid by citizens of any other developed country, help explain why the pharmaceutical industry is the most profitable of all businesses in the U.S. Adding to the problem is that Americans consume more prescription drugs than any other place in the world.

As an example of the extremely high U.S. drug prices, consider the cholesterol drug Lipitor, the best-selling drug in the world. At CVS, a leading U.S. pharmacy, Lipitor (40 mg/90 tablets) costs $361.99. At, another U.S. pharmacy, the same drug costs $335.97. While in Canada at pharmacy, the cost is $215.46, in The Netherlands $177, and in India at licensed pharmacy, the identical generic drug costs $120.94 (Source: All costs in US$,19 May 2008, from the respective pharmacy websites).

The HSC report cites a McKinsey Global Institute (MGI) study which estimates that drug prices are 70 percent higher in the United States compared with OECD countries. When it comes to devices, The United States spends 54 percent more than OECD countries for the top-five inpatient medical devices (e.g. implants, stents). Plus, physician pay in the U.S. is more generous than in other countries, particularly if they are using those cutting edge medical technologies. Only the salaries of American nurses are in line with OECD countries. As for physicians, our doctors must be paid more in part because they graduate from medical school with enormous loans. Other countries subsidize the cost of medical education. If we followed that model, covering medical school tuition and expenses would cost all of us far less than paying specialists 6.6 percent of GDP per capita over the course of a 35-year-career.

American health care also has a tendency to apply a one-size-fits-all approach over an individualized approach. Consequently, only a minority that fits in a very specific profile benefits from the broad application of standardized treatments.

However, the technology itself isn’t the only problem. Low productivity is also a contributor to health care inflation. Healthcare delivers new technologies relatively inefficiently. For instance, too many small facilities that invest in cutting edge technologies run well below capacity. In other words, the new technology is too widespread and is not being used efficiently. And as a result, the low capacity facilities, which are usually smaller sized facilities, have to charge a higher price to cover the costs of the technology. For example, in contrast to a hospital where CT equipment is being used for 20–30 scans per day, freestanding outpatient facilities, which charge high prices and incur lower overhead can earn a profit at 4–8 scans per day. Duplication of services results in higher costs, higher usage rates and inefficient use of capital.

US physicians, like their patients, tend to believe that more healthcare is always better. They are forgetting that all medical products and procedures, even screening for heart disease, problems in major blood vessels and a variety of cancers, carry risks. These interventions do prevent advanced illness in some patients, but relatively few. The point is that while some patients benefit from some tests, other tests are likely to do more harm than good.

Much of the waste and delay in health care comes from mismatches between supply and demand. In particular, we tend to maintain high capacities in order to meet sporadic demands. Extensive investments in inefficiently used capacity leads to over-treatment, especially when physicians are referring patients to facilities in which they have a financial interest. Too often, physician- investors send patients to these facilities for a test or a treatment on the theory that “it can’t do any harm,” even while there is no medical evidence that they will benefit. Thus, when we waste healthcare dollars, there is a real danger that patients will be harmed one way or another.

Our inefficient use of ever-more expensive medical technologies stands as the major explanation for unaffordable health care. The U.S. is the only nation in the developed world that has decided to let healthcare become a largely unregulated, for-profit enterprise. As a result, in the U.S., those who produce new medical technologies set prices without much resistance. The producer is the price-maker and consumers are the price-takers.

In the US healthcare market, the seller decides how much and what type of care a patient needs, not the consumer. This is one reason why we are spending too much and patients are undergoing too many cutting edge procedures. Nobody asks whether spending on computers or automobiles is too high because only private purchasing decisions are involved. Consumers decide what they want to buy, based on their preferences and their budgets. If spending on computers increased sharply, most would label this a success story, meaning that improvements in the products were so meaningful to consumers that they have decided to sacrifice other goods and services to spend more on computers. When it comes to medicine, consumers here are dependent on physicians. Although service providers outside of health care also have incentives to convince consumers to spend more, health care professionals are likely to have more influence because of consumers’ limited technical knowledge and the urgency, fear and pain involved in many medical episodes. Patients do not decide to sacrifice other goods and services to spend more on healthcare, they feel they have no choice.

In other nations, the government protects taxpayers and consumers by negotiating with drug-makers, device-makers, hospitals and doctors, setting limits on how high prices can go. Our government doesn’t do this, so we shell out more for every pill and procedure.


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