top of page

Out of these 6 theories explaining why U.S. healthcare costs are so high, only 3 of them are true

Updated: Feb 6, 2021

Christina Cole

Let’s assume you’re an average person. If you moved to England tomorrow, you’d pay $1540 less in government taxes for your healthcare per year. Sounds pretty good, right? But let’s say you got into a car accident on the way from the airport. What do you get in return for that slightly lower tax you pay to the government when compared to the U.S.? Well, unlike the U.S., you’d actually get healthcare that’s free.

The USA spends more than an other developed country on healthcare, so much so that even public spending per capita is higher than most developed countries. And that’s not even counting private spending—the U.S. is one of the only developed countries to operate with a private system, meaning that you pay out of pocket for the healthcare you receive. That seems like a ridiculously unfair deal for Americans: with a few exceptions, not only do they have to pay for their own healthcare, but they also have to pay as much to the government as if their healthcare system was public—and instead of that money, being enough to pay for nationalised healthcare for everyone, it’s only enough to pay for Medicare and Medicaid, programs for the elderly and the poor.

When evaluating the efficacy of a healthcare system, economists use the three criteria of access, quality and cost. Access is how many people can receive medical care; quality is the standard of healthcare provided; and cost, incidentally, is where the America is exceptionally lousy. The U.S. spends 18% of its GDP on healthcare—compared to Australia, which spends 9%.

The debate over healthcare in America has become clouted with political gains and party one-liners. And yet nothing ever seems to change: we’ve been electing the same clowns into office for years, and healthcare spending per capita has only increased over that time. Republican representative Tom Price said in 2016 that hundreds of millions of dollars are being wasted by malpractice lawsuits; others think that it’s doctors raking in more money; and many of those overseas assume that it’s because of Americans’ fat-loaded factory-made diet. With that being said, let’s evaluate what the data says, and which theory is supported by the evidence. Here are six of the most frequently cited causes for why American healthcare costs so much, and whether or not they actually make any sense.

Theory number 1: The theory goes that since Americans with insurance know they will be covered, they ask for more treatment than necessary. Insurance companies have to pay for these unnecessary services, which drives up costs for everyone.

Evaluation: False

  • Americans actually go to the doctor less often than members of the public from other developed countries. They also stay in hospital less, and this is likely because of sky-high costs, as opposed to the cause behind them. With Americans receiving less treatment on average per capita, it’s hard to see how unnecessarily administered healthcare is the cause fuelling high prices.

Theory number 2: Americans are more in need of medical care due to their unhealthy lifestyle.

Evaluation: False

  • Data shows that 96% of medical costs cannot be blamed on disease prevalence. It’s highly unlikely that Americans’ diet has a significant impact on total healthcare costs.

  • Within a population, the same number of people will always end up dying no matter what, since a healthy lifestyle doesn’t make you immortal. Whether deaths and treatments are premature as a result of junk food and sodium levels doesn’t change the fact that they’re going to happen anyway, resulting in similar costs. The only thing that changes is a potential need for prolonged treatment throughout life, which has a minimal impact on costs.

Theory number 3: Hospitals, doctors and nurses take in more profits.

Evaluation: True

  • This is a two-part problem. Firstly, doctors in the US make an average of $218,713, compared to an average of $133,723 under OECD nations, meaning that a large part of the extra money Americans pay for healthcare ends up in doctor’s pockets.

  • Secondly, hospitals are run privately, which means that they have an incentive to make money—unlike with a nationalised system like the UK, where hospitals a certain amount of funding decided by the government. This means that U.S. hospitals can set their costs for services like emergency rooms at higher prices, knowing that most Americans won’t be browsing catalogues of the best value hospital stays when they get into a car accident and need brain surgery. In other words, the healthcare market rarely affected by competition—something hospital CEOs are quite happy about.

Theory number 4: Doctors are afraid of malpractice lawsuits, which is when they’re sued by a patient for not providing enough medical care. In order to avoid these suits, doctors order extra and unnecessary tests to cover themselves—known as “defensive medicine”.

Evaluation: False

  • If this were the case, you would expect healthcare costs to go down when laws against malpractice suits were implemented. But when Texas, South Carolina and Georgia all implemented laws making it harder to sue doctors, healthcare costs only dropped for emergency rooms in Georgia, and only by 3.6%.

  • Estimates place total percentage of healthcare spending taken up by defensive medicine at 2-3%; in other words, it is partially responsible for high costs, but only minutely. And the emphatic dedication of several congress Republicans in claiming that it’s the single biggest factor is inaccurate and misplaced.

Theory number 5: The U.S. healthcare system is incredibly complex, with separate hospitals and insurance companies having to deal with different government programs, rules, enrolment dates and insurance plans. This adds up to an enormous amount of administrative paperwork that costs time and money.

Evaluation: True

  • A recent study found that in 2017, administrative costs made up 34.2% of healthcare costs, far more than other developed countries.

  • For every three doctors in the U.S., there are two administrative staffers in charge of paperwork.

  • Administrative costs for the elderly are considerably lower. Those 65 and over in America are covered by Medicare, a plan where the government pays for their health insurance. This national plan is much simpler than a private insurance system, resulting in what you’d expect—administrative costs for those 65 and older are only 1.4%.

Theory number 6: The prices of everything—from equipment, to testing, to drugs—are significantly higher. For example, hip replacements and MRI scans are far more expensive in the U.S. than in Europe. This is a direct result of the U.S.’s weakness at negotiating for lower prices when it comes to healthcare due to a lack of centralised government healthcare.

Evaluation: True

And so finally, we’ve come to the main reason why American healthcare costs are so high. Let’s imagine you’re a company that sells X-ray machines, and the UK government comes knocking on your door, wanting to buy X-ray machines for the entire country. You really want to strike a deal with them, because that would bring in a huge profit for the company; and at the same time, you know that other companies really badly want this deal too, so you’re going to lower the price you’re selling the X-ray at so that the UK government chooses to source their X-rays from you rather than any other company. Other providers will do the same thing and lower their prices, creating a competitive market that enables both parties to get a fair deal.

When you have an entire government program negotiating for a price, healthcare providers have a huge incentive to competitively offer lower prices because they know that it’s a massive deal to strike. In contrast, a smaller hospital striking a smaller deal doesn’t have that leverage power, so they can’t get those lower prices.

And the evidence confirms this: a recent study by Rand Corporation found that private insurance companies paid almost two and a half times what Medicare would have paid, for the same medical service at the same facility.

And it doesn’t help that drug companies are patent protected by the government, meaning that once a drug company has developed a new drug, other companies can’t reproduce it. This creates a monopoly, where providers can put soaring prices on drugs, which they claim is necessary to fund research for the next drug treatments.

If reading this has taught you anything, it’s that U.S. healthcare is incredibly complex. And while I want to be able to tell you that this article provides all the answers, it’s still a simplified version of an issue that requires more than just a whistle-stop tour. With that being said, it’s time to acknowledge that the problems in our system are real, tangible, and require more than just a band-aid to heal them.


Want to be the first to know whenever we publish new articles like this one?

Thanks for submitting! You'll stay in the loop now.

bottom of page