Running Head: EXPENSIVE U.S. HEALTH CARE 1

Why U.S. Health Care is So Expensive

Health Services Finance

Julie DeSalva

Prof. Robert Alvarez

December 14th, 2015

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Spending on health care costs is one of the greatest sources of contention in American

society. However, there is a great deal of confusion about the sources of those health care costs

and why they make American health care so expensive. This paper asserts that the major reasons

why American health care is expensive are a lack of consumer understanding about their health

care costs, a system that incentivizes quantity of services performed, and the pricing and use of

expensive medical treatments and equipment.

To start with, an explanation of what consumers do not understand about their health care

costs is needed. One considerable factor in health care costs are hospital chargemasters. The

hospital chargemaster, in short, is a hospital's internal pricing list (Brill, 2013). Hospital

chargemasters do not appear to have a basis on objective measurements like costs to provide

services and goods, and vary in the pricing each lists for their goods and services provided (Brill,

2013). This is significant for patients, as consumers of health care goods and services.

Chargemaster prices can be painfully high to patients. Hospital administrators justify the pricing

by stating that they do not expect to receive full compensation of the prices, and that the pricing

to be paid can be negotiated. However, patients are largely unaware that they have the option to

negotiate the rates listed in their hospital bills and hospitals are not prone to volunteering this

information to their patients (Brill, 2013). This plays into more expensive health care, as this

ignorance means that patients end up paying more than they would need to. Another factor in a

lack of consumer understanding about their health care costs is the declining portion of out-of-

pocket expenses borne by patients. Out-of-pocket expenses paid by patients had declined from

33% of personal health care expenditures in 1975 to 15% in 2005, and were projected to fall

another 2% by 2015 (Orzag & Ellis, 2007, p. 1794). This contributes to more expensive health

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care, because, the lower the cost borne by consumers, the more services consumers will then

demand, whether they have a real need for those services or not (Orzag & Ellis, 2007, p. 1794).

This also contributes to a tendency to “overdoctor” patients, as the more services patients

demand, necessary or not, the more payments their health care providers will receive for the

greater quantity of services they provide (Orzag & Ellis, 2007, p. 1794). This leads in to the next

reason for why American health care is expensive.

As previously mentioned, the greater the amount of services patients demand, the more

services health care providers will perform and, thusly, be paid for. It can be common for health

care providers at some hospitals to look for patients for whom to perform services just to add to

the payments they will receive as a result (Brill, 2013). This is largely caused by the

conventional fee-for-service, which renders payment to health care providers for the number of

services performed and complexity of care given (Moody, 2015, p. 109). This incentivizes health

care providers to perform more and more intense services for patients (Moody, 2015, p. 109).

Similarly, the decline of inpatient days has corresponded to a tremendous increase in outpatient

services, which, rather than contributing to a decrease in costs, now accounts for about two-thirds

of the $750 billion overspent in American health care (Brill, 2013). Overtesting and overordering

tests also contribute to higher health care expenses. Much of the tests that are overordered are

performed as routine daily bloodwork and other laboratory tests performed on patients

undergoing long hospital stays. These are not necessarily needed, but are common and unlikely

to cease, as they provide a constant cash cow (Brill, 2013). Americans are also more likely than

citizens of other countries to receive more high-tech testing. For example, health care providers

in the U.S. perform 71% more CT scans per capita than health care providers in Germany, whose

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health care system does not offer the kind of incentives overtesting in the U.S. does (Brill, 2013).

Furthermore, the more high-tech testing equipment that is available, the more often health care

providers use them. For example, in 1997, less than 3,000 CT and MRI scanners were available

in the U.S., and an average of 3,800 scans were performed annually using them; in 2006, there

were more than 10,000 CT and MRI scanners were available in the U.S., and an average of 6,100

scans were performed annually using them (Brill, 2013). All of this does not, however, translate

into a higher quality of care, but can cause even more health care costs, due to failures in care

coordination and delivery and overtreatment (Moody, 2015, p. 109). Finally, the high-tech

testing feeds in to the last reason to be discussed in the following paragraph.

Now, the high-tech equipment in use in hospitals and other health care facilities for use in

procedures and testing can be incredibly expensive. The CT equipment in Stamford Hospital's

operating room likely cost the hospital about $250,000 to purchase (Brill, 2013). However, the

more this type of equipment is used, the more its services can be billed, and, thusly, pay back for

the cost to purchase it. A McKinsey study found that the typical piece of medical equipment will

pay back its purchase cost within 12 to 18 months if it performs 10 to 15 services daily (Brill,

2013). This means that, for a piece of equipment with an expected useful life of 7 to 10 years,

the services it performs every year after its payback period translates to total profit for the

owning facility, which incentivizes its purchase and usage (Brill, 2013). This, of course,

translates to higher health care expenses, as there is little reason for health care facilities to not

purchase expensive medical equipment when they can quickly recoup the investment cost and

make unmitigated profit until they reach the end of the equipment's useful life. The pricing and

use of state-of-the-art prescription drugs also contributes to expensive health care in the U.S.

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Over $280 billion is spent on prescription drugs in the U.S. annually (Brill, 2013). The American

patent system and lack of limits on drug pricing mean that pharmaceutical companies can price

their products at much higher prices in the U.S. than they would in other countries. For example,

another McKinsey study found that prescription drug prices, in general, are 50% higher for

corresponding drugs in the U.S. than they are in other developed countries (Brill, 2013).

Furthermore, Medicare, whose spending on cancer treatment drugs alone increased from $3

billion in 1997 to $11 in 2004, must pay 6% more than the average sales price for prescription

drugs and is forbidden from negotiating the prices it pays for prescription drugs with the

drugmakers (Brill, 2013). Adding to this, the average sales price Medicare must use is not a true

average in reality, as this price is provided to Medicare by the drugmakers and does not

necessarily reflect the average of what health care facilities may pay for the same drug (Brill,

2013). The process by which health care providers decide upon which medical devices they give

to their patients is also ripe with manipulation. Doctors are regularly given significant

compensation from medical device companies for their products, which includes royalty

agreements, stock options, research grants and fellowships, and consulting agreements (Brill,

2013). This practice removes the ability of the market to regulate prices of medical devices,

which easily leads to higher health care costs. As far as what people will pay for their medical

treatments, studies consistently show that moderately higher or lower prices for medical

treatments do not truly affect the consumer purchase decisions, as spending on health care has

little of the usual price sensitivity found in other markets, even in situations where the patient

knows the price of the treatment prior to treatment (Brill, 2013). This is to be expected, as a

person at risk of death or in pain is unlikely to reject a treatment that can avert their troubles

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despite the price tag being higher than expected. Furthermore, there are government restrictions

on how research into the comparative-effectiveness of drugs and medical procedures can be used

by Medicare, meaning that, even though evidence may exist that one drug may be as or more

effective than another and/or is cheaper, it is unable to make use of such information, even to

curb its costs (Brill, 2013). To sum up, health care goods and services are allowed to have or

maintain expensive prices by the American health care system, as health care facilities can easily

payback their investment in state-of-the-art technology, drugmakers and medical device

companies are protected by government regulations and may price their products as they please,

and patients and insurance programs like Medicare are largely unable to make other, less

expensive choices, for various reasons.

Increasingly, Americans, including those with insurance and in the middle class, find that

their health care is uncomfortably expensive or impossible to pay for, especially in instances of

catastrophic injury or illness. The explanation for the priciness of American health care is

confusing at best, and labyrinthine at worst for the average person. While there may be other

reasons behind this costliness than the way that medical equipment and prescription drugs are

used and priced, how the health care system has incentivized quantity of services provided, and

how patients are largely ignorant of what their health care costs entail, these three are some of the

most important. By taking these into account and changing the health care system to correct for

them, Americans might be able to curb some of the spending and overspending that currently

defines its health care.

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References

Brill, S. (2013, April 4). Bitter pill: Why medical bills are killing us. Time, 181(20), 42.

Retrieved from http://time.com/198/bitter-pill-why-medical-bills-are-killing-us/

Moody, Michael J,M.B.A., A.R.M. (2015). PUTTING THE BRAKES ON HEALTH CARE

COSTS. Rough Notes, 158(2), 108-110. Retrieved from

http://search.proquest.com/docview/1654998393

Orszag, P. R., PhD., & Ellis, P., PhD. (2007). The challenge of rising health care costs -- A view

from the congressional budget office. The New England Journal of Medicine, 357(18),

1793-5. doi:http://dx.doi.org/10.1056/NEJMp078190