U.S. Healthcare System: Cost, Outcomes, and Reform

Introduction

At the high end, the U.S. has the best healthcare system in the world, leading the way in terms of innovation and quality of care. The problem is that the distribution of quality — and of care itself — is uneven. There are many problems that emerge when the system is subjected to closer inspection. The U.S. ranks poorly with respect to health outcomes among industrialized nations. Millions of Americans have no, or inadequate, health coverage. The costs associated with the U.S. healthcare system are much higher than in comparable nations. If the quality of care were significantly better, higher costs might be acceptable, but with poor health outcomes, overprescription of antibiotics, and an emphasis on billing rather than patient care, the U.S. healthcare system has more than its fair share of shortcomings. If an optimal healthcare system provides a high standard of care for everyone and delivers value for money, then on that measure the U.S. system is both inefficient and ineffective. This paper highlights some of the key issues.

The Cost of U.S. Healthcare

A good healthcare system should be efficient, delivering results at a reasonable cost. One of the biggest issues in the U.S. healthcare system is its cost, which is significantly higher than in comparable countries. In some ways this is intuitive, because building profit into every step will produce a higher total cost to the payer. The theory is that a private business will be run more efficiently than a government-run system. The problem is that many government-run systems are already striving for efficiency due to funding pressures, and when they succeed, the marginal efficiency gains of the U.S. system are not enough to offset the additional costs associated with profit-taking.

Profits in U.S. healthcare are predictable to a student of economics. Economists argue that government intervention in an economy can lead to market failure, but the same can be said of information asymmetry. Most people know very little about their own health, and even less about the actuarial science used by the insurance industry. Because of this, and because payers typically have low price elasticity of demand where their health is concerned — the alternative being to suffer and die — industry players leverage these information asymmetries for profit. This is a recognized cause of market failure in healthcare (Bloom, Standing, & Lloyd, 2008). The Affordable Care Act included some provisions that take modest steps toward improving consumer knowledge. Insurance exchanges, for example, use a marketplace structure to educate consumers about different healthcare plans, which should increase their information, if only marginally.

Further complicating the cost issue is the fact that some payers — the government through Medicare and Medicaid — do have greater information and bargaining power, and use this to constrain payments to practitioners. As a result, healthcare providers typically must earn their profits from a smaller portion of their user base: privately insured individuals and cash payers. Consequently, Americans pay far more for healthcare, on average, than citizens of any other country. Annual U.S. healthcare spending stands at $8,362 per capita — double the level of Canada and substantially higher than the second-highest spender in the world, Luxembourg, at $6,743 (Rogers, 2012).

The U.S. outspends other countries in nearly every category. Drug costs are a major driver of healthcare spending and offer a useful basis for comparison, because the drug itself is identical in every country — something that cannot always be said of medical procedures. In a survey of six drugs, the U.S. was found to have the highest prices of any country on all six, and it was not close (Klein, 2013). The explanation lies partly in the cost of drug development, which is an extensive process that can take years and cost billions of dollars (Mullin, 2014). To allow companies to recoup these costs — including the costs of failed developments — regulators grant a 20-year monopoly on a given drug formulation, providing enough revenue to fund future research and return profit to shareholders. Most countries with public healthcare systems respond by placing caps on what drug companies can charge, because in those systems the government is both payer and regulatory authority. The same dynamic applies in the U.S. through Medicare. As with medical procedures, the industry is left to recoup most of its profits from a subset of payers, since government programs allow only limited profit margins. Information asymmetry and low price elasticity of demand already give sellers considerable bargaining power, but under monopoly conditions these factors become especially susceptible to abuse.

Healthcare Effectiveness and Outcomes

The high cost of healthcare in the U.S. might be tolerable if the quality of care were genuinely superior, or if everyone received it. The reality is that neither condition holds for most Americans. Prior to the rollout of the Affordable Care Act, the U.S. Census Bureau estimated that 42 million Americans had no health insurance at all (Smith & Medalia, 2014). Approximately one-quarter of these individuals were able to obtain coverage as a result of the ACA, but that still leaves a gap of around 30 million Americans without health insurance (Wayne, 2014).

Then there is the matter of health outcomes. Outcomes in the U.S. healthcare system have been declining since the 1970s, to the point where in 2006 the country ranked 39th in the world in infant mortality, 43rd for adult female mortality, 42nd for adult male mortality, and 36th for life expectancy. A high number of preventable deaths continue to result from obesity, hypertension, smoking, physical inactivity, and elevated blood glucose. The U.S. consistently ranks among the worst of industrialized nations on these measures (Murray & Frenk, 2010). Even where the U.S. has improved some health rankings, that improvement has often reflected a shift from mortality to morbidity — from death to chronic illness (Grush, 2013).

Thus, the U.S. healthcare system delivers very poor value for money. Some of this poor performance is directly attributable to health policy. The uninsured face worse health outcomes than those with insurance: they are more likely to delay visits to the doctor and, as a consequence, present with more serious conditions. There is also the risk of being turned away for treatment. Moreover, the healthcare system is burdened when uninsured individuals, unable to access preventive care, turn instead to emergency rooms. This both worsens their outcomes and raises costs, since emergency medicine is more expensive than preventive care. In emergency rooms the government is often the payer of last resort, making this the default choice for many uninsured Americans — if they seek care at all.

Conclusion

The problems in the U.S. healthcare system are long-run and structural, and not much has been done to address them. The healthcare industry still has significant gaps, still builds too much profit into the cost of care, and still incentivizes overconsumption. Overprescription remains a problem, and while costs may be contained slightly, they remain the highest in the world. Health outcomes are unlikely to improve rapidly either. It would take well-crafted legislation considerable time to work through such entrenched issues — and the ACA is far from a perfect solution.

It will be nearly impossible to eliminate information asymmetry, but that problem is not unique to the United States; it simply makes matters worse here because of the absence of price controls. In essence, there is market failure, and little is being done to correct it. If outcomes were better, the high cost might be more acceptable — but the problem is that Americans pay more, receive less, and experience higher rates of chronic illness and premature death than they should, given what they spend on healthcare. It is, as one might put it, like paying Ferrari prices and receiving a Corolla.

References

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