Why America Has The Highest Healthcare Costs In The World

Americans spend a great deal of money on healthcare, far more than the rest of the world.

According to the 2022 Cost of Healthcare Index (CHI) released recently by Bridge Patient Portal and Medical Web Experts, America spends $10,921 per capita, ahead of Switzerland ($9,666) and Norway ($8,007).

The gap between what America spends compared to the 60 countries included in the CHI becomes even more significant in prescription drugs. Treatment costs 1,309.48% more in America than the median price of the sample countries, followed by Mexico (+153.92%) and Switzerland (+143.00%).

Turkey has the lowest prescription drug prices at 70.21% less than the sample median.

According to Peter J. Pitts, former FDA associate commissioner, prescription drug costs are not the most significant driver of American healthcare costs.

"In the United States, hospital care ranks first at 31.4%, next is physician and services at 14.9%, 'other' personal healthcare at 15.5%, and then prescription drugs at 9.7% -- under a dime on the American healthcare dollar and they are the slowest growing slice of the healthcare pie," Pitts told International Business Times.

A good indication of how expensive healthcare is in America is the average nightly cost of Covid patient care, including labor costs, equipment, testing and drugs. It was the U.S. ($20,939), followed by Norway ($11,590) and Switzerland ($9,297).

Healthcare is an expensive social good worldwide due to the "third party" payment system. Healthcare providers do not get paid directly by the patients who receive the service, but by a third party, private or government insurance. And that generates inefficiencies on both the demand and the supply side of the healthcare service market.

Patients may pay excessive visits to the medical providers as they don't have to pay the total price for the service. Healthcare providers have the incentive to provide exorbitant services to patients as they can charge the insurance companies rather than the patients for that.

The ultimate cost of health services depends on the nature of the healthcare service market. In countries where the insurance market is a monopsony, meaning a single large insurance company dominates it, healthcare services are expected to be less expensive than in countries where the insurance market is highly competitive, consisting of many smaller insurance companies.

The explanation is simple.

The large insurance company can negotiate more significant discounts than the smaller insurance companies from the medical providers.

According to Nicholas Creel, assistant professor of business law at Georgia College and State University, America's market for healthcare services falls in the second category.

"The primary reason healthcare in the U.S. is so expensive compared to our peers is that we heavily utilize private insurance versus a public universal option," he told International Business Times. "With each private insurance company having to negotiate with healthcare providers separately, their leverage in negotiations is substantially smaller than in countries where a single public entity represents the entire population. Hence, they can pay a lot less for the same services than we do."

According to the 2022 CHI, citizens in the U.S. contributed the most to healthcare schemes through taxation and compulsory health insurance (700.62% more than the dataset median), followed by Norway (+509.22%) and Switzerland (+472.16%).

Citizens in Nigeria contribute the least at 98.85% less than the dataset median.

Creel sees another factor that drives healthcare costs higher in the U.S., the extreme lack of preventive care.

"With so many Americans eschewing care for routine checkups, visits to the doctor that could result in early diagnosis and treatment of a host of conditions like high blood pressure or cancer, the result is these issues aren't identified until they manifest into a much more difficult and expensive-to-treat condition," he explains. "The old adage 'an ounce of prevention is worth a pound of cure' speaks to just this logic, and yet the U.S. remains focused on the latter rather than the former."

The gap between what Americans pay and the average of the sample of countries included in the CHI is far too big to be explained by a couple of factors alone.

Dr. Mahmoud Manzoor of Limelight adds the high cost of doctors' education in the U.S.

"Doctors' education costs an astronomical amount in the USA," Manzoor told International Business Times. "They graduate with hundreds of thousands of dollars of debt and must recoup that either in their private practice or at a hospital job. That raises costs down the line. There is talk about how to reduce it, but as long as colleges can make big money on these programs, they won't be inclined to change."

Then there's the decline in charitable and nonprofit hospitals in the last 60 years and their substitution with for-profit hospitals adding to the high cost of healthcare in America, according to Manzoor.

"Back then, many hospitals were started by churches or as community nonprofits. As the expense and need for technology grew, many sold out to for-profit companies," he said. "They began to offer more specialized treatments at higher costs. Hospitals, doctors and healthcare services generally have an 'insurance will pay for it' mentality because of how medical insurance is set up here. They charge an amount that is way more than it should be because they know they will have to take a percentage off, or offer some under their insurance contract. The obscene amount makes that more of a market stabilization that insurance companies must use as an average and pumps more money out of patients who can pay it out of pocket or beyond the insurance deductible."

The debate over the high cost of healthcare is "stuck on hold and plagued by soundbites," as Pitts puts it. He thinks it's time to add substance and science into the conversation.