High Cost of Healthcare
One of the main reasons health insurance is so expensive in the United States is because the underlying cost of healthcare itself is incredibly high. According to data from the Organization for Economic Cooperation and Development (OECD), the U.S. spends far more on healthcare per capita than any other developed country. In 2020, the U.S. spent over $12,500 per person on healthcare – the next highest country was Switzerland at around $8,000 per person.
There are a few key factors driving the exorbitant prices of healthcare in America:
High Prices for Medical Services and Prescription Drugs
Prices for medical services, tests, procedures and prescription drugs are significantly higher in the U.S. compared to other countries. For example, a standard MRI scan costs around $1,119 on average in the U.S. versus $503 in Australia and $215 in Spain. New brand name prescription drugs cost 3-4x more in the U.S. than in the UK or Canada.
High Administrative Costs
The U.S. healthcare system has incredibly high administrative costs due to its complex multi-payer insurance system. Billing, enrollment, eligibility verification and other insurance-related functions account for around 8% of total U.S. healthcare spending.
Expensive New Medical Technology
The U.S. is often an early adopter of expensive new medical technologies, pharmaceuticals and treatments. Adoption of these drives up costs, but other countries can benefit from lower prices once they become more widely available.
Higher Wages for Healthcare Workers
Salaries for physicians, nurses and other healthcare professionals tend to be higher in the U.S. compared to other countries. For example, primary care doctors earn around $260,000 per year on average versus $150,000 in Canada. Higher wages contribute to higher costs for medical services.
Insurance Industry Practices
The structure and practices of the private health insurance industry in the U.S. also drive up premium costs for consumers in a number of ways:
Profits and Overhead
Private health insurance plans in the U.S. face expenses other systems don’t have, like broker commissions, administrative expenses and shareholder profits. These overhead costs and profit margins directly raise insurance premiums.
Underwriting and Actuarial Pricing
The ability for health plans to deny coverage or charge people higher premiums based on age, health status and pre-existing conditions increases costs for many, especially the sick and elderly.
High Prescription Drug Costs
Prescription drug costs are the fastest rising healthcare expense in the U.S. Brand name drug prices are inflated and healthcare plans pay the high prices set by pharmaceutical companies. High prescription costs then get passed on through higher insurance premiums.
Premium Rating Factors
Insurers are allowed to adjust premiums based on individual factors like age, location, plan type and tobacco use. This leads to wide variation in rates, with many left paying expensive premiums.
Low Rate of Enrollment
The rate of uninsured individuals in the U.S. remains high compared to other developed nations. When healthier individuals forego coverage, it leaves the overall insurance pool more expensive to cover. This drives up premiums for those enrolled. Uncompensated care for the uninsured also shifts costs to the insured through higher rates.
Limited Regulations and Oversight
The U.S. has fewer government regulations and controls on pricing in healthcare compared to other systems. Other countries utilize price setting, negotiations and reference pricing to control costs. Without these measures, the U.S. healthcare prices are subject to steep market-driven inflation.
Because most non-elderly Americans get coverage through employers, individuals are detached from the true costs of healthcare. Generous tax subsidies incentivize expensive plans with low deductibles and copays, which drives up utilization and overall costs.
The U.S. population is aging, with higher rates of chronic conditions that are more expensive to treat. As the pool of insured individuals gets older and sicker on average, premiums rise to cover more claims. Elderly individuals see the highest premiums due to their healthcare costs.
Low Use of Preventive Services
Despite progress made by the ACA, utilization of preventive care and services like regular primary care and screening tests remains low in the U.S. This leads to higher rates of serious illness that could have been prevented or mitigated with early intervention.
Prevalence of Chronic Disease
Chronic illnesses like heart disease, cancer, diabetes and obesity are very prevalent in the U.S. population, more so than other developed nations. These conditions are very expensive to treat and a significant cost driver for the healthcare system and insurance premiums.
Consolidation in Healthcare
There has been a major trend of consolidation among hospitals, healthcare systems and insurance companies. Lack of competition reduces incentives to lower prices, contributing to the high costs passed onto insurance plan members.
Cost-Shifting from Public to Private Payers
Government health programs like Medicare and Medicaid tend to reimburse providers at lower rates than private payers. Providers shift these losses onto private insurers through higher negotiated rates, which translates to higher premiums.
Regulations and mandated benefits vary widely at the state level. Initiatives in some states around high-risk pools, reinsurance programs and cost controls have seen success. However, regulations also drive up administrative costs for insurers operating in multiple states.
In conclusion, health insurance is extremely expensive in the United States due to uniquely high healthcare costs as well as a myriad of factors and practices within the private insurance system. Lack of pricing regulation, aging and unhealthy populations, and the employer-sponsored insurance model all drive costs upward for consumers. While the Affordable Care Act expanded coverage and introduced cost controls, premiums and out-of-pocket costs for many Americans remain prohibitive. Significant reforms would be required to reduce costs to levels seen outside of the U.S.