Why are American Healthcare Costs so High?

US healthcare costs are now so high that even Warren Buffett is worried about them. The Oracle of Omaha went so far as to appeal on the PBS News Hour and recommend single-payer health insurance as a solution.

The data shows that Buffett has a very good point, the U.S. spent 17.1% of its gross domestic product (GDP) on healthcare in 2014, the World Bank reported. In contrast the United Kingdom spent 9.1% of its GDP on healthcare the same year.  Australia spent 9.4% of its GDP on healthcare the same year.

Uncle Warren is afraid that things are about to get a lot worse, he’s scared of healthcare rising to 25% of the US GDP and that’s possible. Back in 1995 healthcare made up of 13.1% of America’s GDP.

The danger from this is clear, healthcare expenses will start cutting into everything; including corporate profits, government funding and individual incomes. Some potential problems include government health-insurance programs like Medicare, Medicaid and the Veterans Administration becoming unsustainable; employers being unable to afford health coverage for workers and insurance companies being unable to insure large segments of the population.

Why are Healthcare Costs so High?

There is no one reason why U.S. healthcare costs are so high. Instead it is created by a perfect storm of a variety of circumstances.

Some causes of insane healthcare costs include:

  1. The large number of Americans without health insurance. Between 8.5% and 10% of the US population lacks health coverage according to the Congressional Budget Office (CBO). The number is down but between 32.475 million and 27.75 million Americans still lack health insurance. This raises costs because hospitals are forced to eat the cost of covering those people when they get sick or hurt. Another problem is that those people don’t seek medical care until they have no choice. That means they are a lot sicker and more expensive to treat when they do seek care. For example a person with high-blood pressure or cholesterol who could have been treated with a simple prescription has a heart attack and requires a triple bypass. This really raises Medicare costs because many people don’t start going to the doctor until they turn 65.

  1. The large number of Americans with inadequate insurance. The dirty secret of Obamacare is that a lot of the policies issued through it are junk health insurance. The copays and deductibles are often so high they are useless. A person might have to pay several hundred or several thousand dollars out of pocket for treatment that he or she does not have. So he or she doesn’t go to the doctor until it is too late. A related problem is that healthcare providers wanting to get paid and not turn anybody way simply raise prices to reach the deductible.

 

  1. Lack of a free market in prescription drugs. There is only provider for a lot of drugs because of the patent system. This enables pharmaceutical houses to jack up prices. No competition means high prices, and no way to control them. One problem is that it can well over a decade for generic drugs which are far cheaper to hit the market. A potential solution here would be limiting drug patents to two or five years. Another make it illegal to patent any drug developed with federal research data.

  1. The federal government is barred from negotiating for drug prices under Medicare. Medicaid and the VA pay less for drugs because those programs can negotiate for prices.

 

  1. America’s population is getting older. The average age in the US is 37.9 two years higher than at the turn of the 20th Century in 2000, The Hill reported. That means there are now around 49.2 million people over 65 in the nation. This raises costs because older people tend to require healthcare. The problem is going to get worse because the number of Americans over 65 is expected to double by 2030. A related problem is that many of them don’t start getting care until they turn 65 and go on Medicare.

  1. The US is facing a shortage of healthcare professionals. A report from the Association of American Medical Colleges (AAMC) predicts that there will be a shortfall of 34,600 to 88,000 physicians by 2025, CBS There’s also a serious shortage of nurses with 649,100 nursing positions unfilled. One hospital Good Samaritan in Kearney, Nebraska, closed in Transitional Care Unit because of a lack of nurses, Nurse.com reported. Basic economics teaches us that scarcity increases prices. There are some potential solutions including having the government simply pay the medical or nursing school tuition for any US citizen.

 

  1. There are no central cost control mechanisms for healthcare in the United States. The United States is the only major industrialized country with no national means of limiting costs. In nations like Britain and Australia the government can control costs with single-payer. For example there is one price for a hernia operation in the country, doctors can accept it or not get paid. One way this is done is to set one price for products, if a healthcare provider wants to stay in business he or she accepts the price. A major driver of costs is health insurance itself which provides unlimited funding for some individuals and procedures.

Would Single Payer Reduce Healthcare Costs?

Is Uncle Warren right would single-payer reduce healthcare costs? Maybe; remember we already have single-payer for seniors in the form of Medicare, and it does a lousy job of controlling costs. One reason for this is that the Centers for Medicare and Medicaid are barred from negotiating for prescription drug prices.

To control costs we would have to have some drastic Medicare reforms such as allowing the Centers to set prices. Another solution would be to expand Medicaid to cover everybody – something they almost tried in Nevada. That might not reduce costs because of increased bureaucracy; there would be 52 different Medicaid programs one for each state, the District of Colombia and Puerto Rico.

A related problem is that Medicaid expansion might be unsustainable because states do not have the money. Three states New Jersey, Illinois, and Connecticut and Puerto Rico are facing serious fiscal crises.

This means American single-payer will have to be national and administered by the federal government. In other words Medicare for All, but it would be a very different system from the one we have now.

One thing is certain American healthcare costs are spiraling out of control. If nothing is done to contain them, single payer healthcare is inevitable whether we want it or not.

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