Oct 21, 2013

Why Does US Have Such Stratospheric Healthcare Costs?

The debates related to Obama Care together with a project related to healthcare market I took part in revealed that healthcare costs in US are extremely high compared to other developed countries. Among the blizzard of who-said-what articles and media coverage on the topic perhaps many asked themselves the question of why are the costs so high on the first place. As soon I had a couple of hours I made a quick research and here is what I found.

The figures in US healthcare are enormous in almost any aspect - the total costs, the healthcare costs as percent of GDP and so on. Please see below two charts I prepared quickly using data from EIU.

Top 20 countries by healthcare spending per head

Top 20 countries by healthcare spending as % of GDP

The US healthcare services have the highest ranks on many indicators  as well as Americans have the highest percent of reporting themselves as feeling healthy but what does drive the costs so high? There are many answers to this question blaming illegal immigrants, not-insured people, greed of doctors, the fear of lawsuit for medical malpractice and so on. Most of them have a point but seems to touch on topics that are more of a detail than addressing the real foundation of the problem. The fundamental reasons could be summarized in two major points:
First, the prices are really high. The comparison of any medical procedure, medication or other related cost, e.g. cost of a hospital bed per night, reveal stark differences. See here for more details and be amazed. Most of it is no good news for us at least because of the invasion of the American TV dramas. The reason seems to be lay in thee fact the U.S. government doesn't manage the medical prices. In contrast, the rest of the world has sort of healthcare plan governed or overseen by the government with a government body that negotiates or controls the costs with healthcare providers. US relies on for-profit insurance companies for essential and elective care. That leads to a huge overhead for administration, marketing and the other business activities of these insurers - some estimate that the overhead is about 20% of total costs. These insurers negotiate the prices for their own and provider good and there is nobody to negotiate for the consumers as is in UK for example. As a result, the prices keep increasing.

The problem with unnecessary procedures also adds to the

Second, the healthcare system seems to be very complex. There is a separate health care system for seniors, veterans, military personnel, Native Americans, the working for the federal government, etc. There is also the great number of private plans. This complexity spurs an army of staff making it run smoothly as information of any kind has to be exchanged between many parties.

It does seem to be too short list but it not a surprise to me - after all, the behavior of the even most complex systems is governed by a small set of simple rules at its foundations. I am sure tons of other details could be add - the competition between hospitals and insurers, the urge to get the greatest and the latest, etc. Despite the pollution of partisan media and the media that simply follows the noise and repeats articles without much of a thought, there are many good articles on Internet on the problem, books as well. US government seems not be blind of the problems as there are many studies by government agencies that quantify problems and identify better courses of actions.

For more information you could check
and this great video:
http://www.youtube.com/watch?v=qSjGouBmo0M .

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