Why Americans Spend So Much on Health Care

August 9, 2018

Originally published by The Wall Street Journal

The U.S. spends more per capita on health care than any other developed nation. It will soon spend close to 20% of its GDP on health—significantly more than the percentage spent by major Organization for Economic Cooperation and Development nations.

What is driving costs so high? Americans aren’t buying more health care overall than other countries. But what they are buying is increasingly expensive. Among the reasons is the troubling fact that few people in health care, from consumers to doctors to hospitals to insurers, know the true cost of what they are buying and selling.

Providers, manufacturers and middlemen operate in an opaque market that can mask their role and their cut of the revenue. Mergers give some players more heft to enlarge their piece of the pie.

Consumers, meanwhile, buoyed by insurance and tax breaks, have little idea how much they are really spending and little incentive to know underlying costs.

A big part of the problem in analyzing health spending is the opacity of the industry.

The bulk of consumers’ health spending now goes to paying for health insurance, a shift from when patients paid directly for health services. Since insurers negotiate prices with providers, it is hard for individuals to judge health costs and make more informed choices.

Contributions to employer-sponsored health coverage aren’t taxed, which makes it less expensive for companies to pay workers with health benefits than wages. Generous benefits lead to higher spending, according to many economists, because employees can consume as much health care as they want without having to pay significantly more out of their own pockets.

The tax benefit is the country’s biggest single income-tax break, costing billions to government revenue.

The prices of many medicines are hidden because pharmacy-benefit managers—the companies that administer drug benefits for employers and health insurers—negotiate confidential discounts and rebates with drugmakers.

Humira, an immunosuppressive, is the best-selling drug in the U.S. Its manufacturer, AbbVie Inc., discounted the price for insurers, PBMs and other purchasers by about 16% from its advertised price in 2016—a big jump from a decade earlier, according to a Wall Street Journal analysis. It isn’t known how much of those discounts are passed to employers and consumers, and how much is pocketed by insurers and PBMs as profit.

One reason prices are rising: Hospitals are becoming more consolidated and are using their market clout to negotiate higher prices from insurers.

This consolidation contributes to the overall increase in health costs, research suggests. Hospitals with a monopoly in a geographic market charge significantly more for procedures than those in markets with four or more competing hospitals, according to researchers.

Prices for medical care started rising significantly faster than overall inflation in the mid-1960s. Prices have been the driver, not the amount of care, for the increase in U.S. spending compared with other countries, according to many economists.

Drug prices have risen the most of the three largest components of health spending since 2000, followed by hospital care and physician services.

Health care has become a larger part of the economy, creating powerful constituencies resistant to changing the way the system operates.

The health-care industry overtook the retail sector as the nation’s largest employer in December, giving local economies and their workers a stake in the industry’s growth. Health jobs surpassed manufacturing jobs in 2008.

The revenues of health-care companies represented nearly 16% of the total revenues of firms in the S&P 500 last year, up from about 4% in 1984.

Health-care companies have more than doubled overall lobbying spending since 1998, and have become a bigger percentage of total lobbying by industries.

Read the full story at The Wall Street Journal