Health care prices in the United States

Health insurance coverage is provided by several public and private sources in the United States. During 2016, the U.S. population overall was approximately 325 million, with 53 million persons 65 years of age and over covered by the federal Medicare program. The 272 million non-institutional persons under age 65 either obtained their coverage from employer-based (155 million) or non-employer based (90 million) sources, or were uninsured (27 million).[6] Approximately 15 million military personnel received coverage through the Veteran's Administration.[7] During the year 2016, 91.2% of Americans had health insurance coverage. An estimated 27 million under age 65 were uninsured.[8]

U.S. healthcare cost information, including rate of change, per-capita, and percent of GDP.

Unlike most markets for consumer services in the United States, the healthcare market generally lacks transparent market-based pricing.[9][10] Patients are typically not able to comparison shop for medical services based on price, as medical service providers do not typically disclose prices prior to service.[9][10][11] Government mandated critical care and government insurance programs like Medicare also impact market pricing of U.S. health care. According to the New York Times in 2011, "the United States is far and away the world leader in medical spending, even though numerous studies have concluded that Americans do not get better care"[10] and prices are the highest in the world.[12]

In the U.S. medical industry, patients generally do not have access to pricing information until after medical services have been rendered. A study conducted by the California Healthcare Foundation[13] found that only 25% of visitors asking for pricing information were able to obtain it in a single visit to a hospital.[14] This has led to a phenomenon known as "surprise medical bills", where patients receive large bills for service long after the service was rendered.[15]

Since the majority (85%) of Americans have health insurance, they do not directly pay for medical services.[16] Insurance companies, as payors, negotiate health care pricing with providers on behalf of the insured. Hospitals, doctors, and other medical providers have traditionally disclosed their fee schedules only to insurance companies and other institutional payors, and not to individual patients. Uninsured individuals are expected to pay directly for services, but since they lack access to pricing information, price-based competition may be reduced. The introduction of high-deductible insurance has increased demand for pricing information among consumers. As high-deductible health plans rise across the country, with many individuals having deductibles of $2500 or more, their ability to pay for costly procedures diminishes, and hospitals end up covering the cost of patients care. Many health systems are putting in place price transparency initiatives and payments plans for their patients so that the patients better understand what the estimated cost of their care is, and how they can afford to pay for their care over time.

Organizations such as the American Medical Association (AMA) and AARP support a "fair and accurate valuation for all physician services".[17][18] Very few resources exist, however, that allow consumers to compare physician prices. The AMA sponsors the Specialty Society Relative Value Scale Update Committee, a private group of physicians which largely determine how to value physician labor in Medicare prices. Among politicians, former House Speaker Newt Gingrich has called for transparency in the prices of medical devices, noting it is one of the few aspects or U.S. health care where consumers and federal health officials are "barred from comparing the quality, medical outcomes or price".[19][20][21]

Recently, some insurance companies have announced their intention to begin disclosing provider pricing as a way to encourage cost reduction.[16] Other services exist to assist physicians and their patients, such as Healthcare Out Of Pocket,[22] Accuro Healthcare Solutions, with its CarePricer software.[23] Similarly, medical tourists take advantage of price transparency on websites such as MEDIGO and Purchasing Health, which offer hospital price comparison and appointment booking services.[24]

In the United States and most other industrialized nations, emergency medical providers are required to treat any patient that has a life-threatening condition, irrespective of the patient's financial resources. In the U.S., the Emergency Medical Treatment and Active Labor Act requires that hospitals treat all patients in need of emergency medical care without considering patients' ability to pay for service.[25]

This government mandated care places a cost burden on medical providers, as critically ill patients lacking financial resources must be treated. Medical providers compensate for this cost by passing costs on to other parts of the medical system by increasing prices for other patients and through collection of government subsidies.[26]

Harvard economist N. Gregory Mankiw explained in July 2017 that "the magic of the free market sometimes fails us when it comes to healthcare." This is due to:

• Important positive externalities or situations where the actions of one person or company positively impact the health of others, such as vaccinations and medical research. The free market will result in too little of both (i.e., the benefit is under-estimated by individuals), so government intervention such as subsidies is required to optimize the market outcome.
• Consumers don't know what to buy, as the technical nature of the product requires expert physician advice. The inability to monitor product quality leads to regulation (e.g., licensing of medical professionals and the safety of pharmaceutical products).
• Healthcare spending is unpredictable and expensive. This results in insurance to pool risks and reduce uncertainty. However, this creates a side-effect, the decreased visibility of spending and a tendency to over-consume medical care.
• Adverse selection, where insurers can choose to avoid sick patients. This can lead to a "death spiral" in which the healthiest people drop out of insurance coverage perceiving it too expensive, leading to higher prices for the remainder, repeating the cycle.[27] The conservative Heritage Foundation advocated individual mandates in the late 1980s to overcome adverse selection by requiring all persons to obtain insurance or pay penalties, an idea included in the Affordable Care Act.[28]

Bar chart comparing healthcare costs as percentage of GDP across OECD countries

Chart showing life expectancy at birth and health care spending per capita for OECD countries as of 2013. The U.S. is an outlier, with much higher spending but below average life expectancy.[45]

U.S. healthcare costs in 2015 were 16.9% GDP according to the OECD, over 5% GDP higher than the next most expensive OECD country.[2] With U.S. GDP of $19 trillion, healthcare costs were about $3.2 trillion, or about $10,000 per person in a country of 320 million people. A gap of 5% GDP represents $1 trillion, about $3,000 per person relative to the next most expensive country. In other words, the U.S. would have to cut healthcare costs by roughly one-third ($1 trillion or $3,000 per person on average) to be competitive with the next most expensive country. Healthcare spending in the U.S. was distributed as follows in 2014: Hospital care 32%; physician and clinical services 20%; prescription drugs 10%; and all other, including many categories individually making up less than 5% of spending. These first three categories accounted for 62% of spending.[3] A 2022 study revealed that the United States is one of the most expensive countries for a 15 minute private doctors visit. The average cost of a visit in the U.S. is $104, while the global average is $40, ranking the U.S. as the #8 most expensive country.[46]

Important differences include:

• Administrative costs. About 25% of U.S. healthcare costs relate to administrative costs (e.g., billing and payment, as opposed to direct provision of services, supplies and medicine) versus 10-15% in other countries. For example, Duke University Hospital had 900 hospital beds but 1,300 billing clerks.[47][48] Assuming $3.2 trillion is spent on healthcare per year, a 10% savings would be $320 billion per year and a 15% savings would be nearly $500 billion per year. For scale, cutting administrative costs to peer country levels would represent roughly one-third to half the gap. A 2009 study from Price Waterhouse Coopers estimated $210 billion in savings from unnecessary billing and administrative costs, a figure that would be considerably higher in 2015 dollars.[49]
• Cost variation across hospital regions. Harvard economist David Cutler reported in 2013 that roughly 33% of healthcare spending, or about $1 trillion per year, is not associated with improved outcomes.[47] Medicare reimbursements per enrollee vary significantly across the country. In 2012, average Medicare reimbursements per enrollee ranged from an adjusted (for health status, income, and ethnicity) $6,724 in the lowest spending region to $13,596 in the highest.[50]
• The U.S. spends more than other countries for the same things. Drugs are more expensive, doctors are paid more, and suppliers charge more for medical equipment than other countries.[47] Journalist Todd Hixon reported on a study that U.S. spending on physicians per person is about five times higher than peer countries, $1,600 versus $310, as much as 37% of the gap with other countries. This was driven by a greater use of specialist doctors, who charge 3-6 times more in the U.S. than in peer countries.[51]
• Higher level of per-capita income, which is correlated with higher healthcare spending in the U.S. and other countries. Hixon reported a study by Princeton Professor Uwe Reinhardt that concluded about $1,200 per person (in 2008 dollars) or about a third of the gap with peer countries in healthcare spending was due to higher levels of per-capita income. Higher income per-capita is correlated with using more units of healthcare.[51]
• Americans receive more medical care than people in other countries. The U.S. consumes 3 times as many mammograms, 2.5x the number of MRI scans, and 31% more C-sections per-capita than peer countries. This is a blend of higher per-capita income and higher use of specialists, among other factors.[4]
• The U.S. government intervenes less actively to force down prices in the United States than in other countries. Stanford economist Victor Fuchs wrote in 2014: "If we turn the question around and ask why healthcare costs so much less in other high-income countries, the answer nearly always points to a larger, stronger role for government. Governments usually eliminate much of the high administrative costs of insurance, obtain lower prices for inputs, and influence the mix of healthcare outputs by arranging for large supplies of primary-care physicians and hospital beds while keeping tight control on the number of specialist physicians and expensive technology. In the United States, the political system creates many “choke points” for diverse interest groups to block or modify government’s role in these areas."[4]

The Congressional Budget Office analyzed the reasons for healthcare cost inflation over time, reporting in 2008 that: "Although many factors contributed to the growth, most analysts have concluded that the bulk of the long-term rise resulted from the health care system's use of new medical services that were made possible by technological advances..." In summarizing several studies, CBO reported the following drove the indicated share (shown as a range across three studies) of the increase from 1940 to 1990:

• Technology changes: 38-65%. CBO defined this as "any changes in clinical practice that enhance the ability of providers to diagnose, treat, or prevent health problems."
• Personal income growth: 5-23%. Persons with more income tend to spend a greater share of it on healthcare.
• Administrative costs: 3-13%.
• Aging of the population: 2%. As the country ages, more persons require more expensive treatments, as the aged tend to be sicker.[52]

According to Federal Reserve data, healthcare annual inflation rates have declined in recent decades:

• 1970-1979: 7.8%
• 1980-1989: 8.3%
• 1990-1999: 5.3%
• 2000-2009: 4.1%
• 2010-2016: 3.0%[5]

While this inflation rate has declined, it has generally remained above the rate of economic growth, resulting in a steady increase of health expenditures relative to GDP from 6% in 1970 to nearly 18% in 2015.[3]