What Drives the Cost of Healthcare so High?

Source: 123RF

The economic principle I’m exploring is: “Institutions are the "rules of the game" that influence choices"

My research question to help me study the economic principle is: "What are the top drivers for cost in the American Healthcare system?

The article “9 Drivers of High Healthcare Costs in America” published by Beckers Hospital demonstrates this principle by breaking down many of the different reasons that Healthcare costs in America keep on rising without end.

First, a lot of the reasons for high cost has to do with the patients themselves. Lots of the cost stems from unhealthy behaviors leading to chronic illnesses like heart disease, cancer, and diabetes. These types of preventable diseases “cause about 70 percent of all deaths in the United States, and they are the most expensive to treat”. Americans also tend to choose the most expensive procedures and technologies when it may not be necessary. The article states that “MRI’s in the United States occur twice as often compared with the average country in OECD data”. This shows that Americans tend to use more expensive procedures more, driving up the cost of everything else. Data from Perelman School of Medicine also found that “Americans average $9,403 per person in annual health care spending. By comparison, Germans and Dutch, average $5,182 and $5,202 respectively.” All of this data really goes to show how much Americans overspend on healthcare.

Secondly, many medical technologies are just expensive to maintain in general. The article states that “Data from the Organization for Economic Cooperation and Development have consistently showed the average unit costs for U.S. physicians, hospitals, facilities and drugs are the highest in the world”. The U.S. is so expansive in its medical care procedures that it just naturally takes up a lot of money. The difference between the US and many European countries that they are always compared to is that the US has nearly 330 million people, whereas most other countries have somewhere between 30-80 million. This puts more strain on the health budget for the U.S. than any other country in the world. 

Thirdly, administrative costs in the US are jacked up way too high. The article states that “The morass of health insurers and billing processes cost the U.S. healthcare system billions in wasted costs every year.” Data from the Perelman School of Medicine found that administrative expense differences were massive compared to other countries “accounting for $752 per-capita of Americans' annual healthcare spending, versus just $208 in the Netherlands, and $232 in Germany.” This is nearly a 3-5 times bigger increase than the other countries, which is ridiculous. If the US can find a way to reduce the administrative costs then our system would save billions of dollars overall.

In my next blog post I will research the question: What should the government change to make healthcare in America better?