Why U.S. Health Care Costs So Much

Avoidable Treatment Costs and Output Losses, 2003

“I have routinely asked doctors and hospital administrators how much of the health care services we provide is pure waste,” says Guy Clifton, MD, the author of Flatlined: Resuscitating American Medicine. “They would usually pause to think, and then I would suggest, “Thirty percent?” They invariably responded, “Oh, at least that.”

Researchers from the Dartmouth Institute for Health Policy have confirmed Clifton’s informal survey, describing a health care system with 30 percent waste—due primarily to underutilization of primary care services, overuse of high-cost specialist services, and the fragmentation of the system itself, leading to poor coordination of treatment.¹ Perhaps it’s not possible to avoid waste entirely, but that wouldn’t be necessary to achieve universal insurance coverage. That 30 percent figure is seven times as much as it would cost to cover all uninsured people.²

Nations with universal coverage spend an average of 10 percent of their GDP on health care; the United States spends closer to 11 percent.³ Most countries with universal coverage include some mix of private and public insurance. Medicare, available to anyone 65 and older, is the closest thing in the United States to a national plan. Medicare is managed by the federal government but pays private providers to deliver care. Some 45 million seniors are enrolled in Medicare.⁴ The “public option” for insurance that the Obama administration and Democrats in Congress proposed would function like Medicare except that it would be available to people younger than 65. As the president explained, anyone who doesn’t want to use the public option could stick with his or her private health insurance. Competition, the bedrock of a market economy, increases with the addition of a public option.

Competition with a public system is the key to making the private system operate more efficiently. The Commonwealth Fund argues that the United States could save more than $100 billion annually if it reduced administrative costs to levels comparable to those of other industrialized countries.⁵ Without a public system to compete against private insurers, excessive administrative costs will continue to be the norm. Quite simply, insurers lose financially when people require extensive medical treatment. So the insurance industry has a lot to gain by spending administrative dollars to weed out potential clients whom they suspect will need expensive health care.

It’s not surprising that when insurers pick winners and losers, the losing side includes people who are sick or elderly, who live with disabilities, or who fall into any other category that might require frequent or expensive medical treatments. Insurers don’t want to cover the 10 percent of patients who account for two-thirds of all health care expenditures.⁶ But this 10 percent are not using up insurance coverage on unnecessary procedures or routine care—they are receiving bypass surgery, chemotherapy, dialysis, and other life-saving care. Trying to force this group to spend more out of pocket is not the answer; no one but a small group of very wealthy people can afford these procedures without incurring devastating amounts of debt.

Health Expenditures as a Share of GDP, OECD Countries, 2007

Issues