Why Is Health Care So Expensive? Breaking Down the High Costs
In today’s discussion, we’re tackling a massive topic: why health care in the United States has become so expensive. While we can’t cover everything in one sitting, let’s explore some of the most significant factors driving up costs and identify areas where improvements can be made.
Listen to Next-Gen Healthcare Podcast episode, Why is Health care SO Expensive?
Two Categories of Health Care Costs
When it comes to rising health care costs, there are two primary categories:
Expected Costs: These include inflationary increases like the rising costs of labor, medical supplies, and general expenses. These are inevitable and difficult to manage.
Controllable Costs: These are the costs that could be managed or mitigated but often aren’t due to systemic inefficiencies or deliberate practices. These are the ones we’ll focus on today.
Insurance Industry’s Role in Inflating Costs
One of the most eye-opening statistics comes from the health insurance industry itself, which inflates the cost of health care services by 80% to 100%. To combat this, the U.S. government introduced the Transparency in Health Care Act in 2020. This legislation requires medical service providers to disclose both cash pricing and insurance pricing, exposing the stark difference between the two.
But why is there such a gap in pricing? Part of the issue lies in the insurance industry’s focus on profits. Since the 1990s, as medical technology advanced and health care became big business, insurers prioritized shareholder returns. This shift has significantly driven up costs, ultimately impacting the consumer.
Inflation vs. Medical Costs
To illustrate the disparity:
Between 1993 and 2023, general inflation rose by 118.45%.
Over the same period, medical costs rose by 172.6%.
Despite technological advances and consolidation within the health care industry, these efficiencies have not translated into cost savings for patients. Instead, costs have ballooned at a much higher rate than other consumer goods.
The Impact of the Affordable Care Act (ACA)
The Affordable Care Act (ACA), or Obamacare, passed in 2010, was a landmark moment for health care. However, it also had unintended consequences, such as doubling the price of health insurance. One key provision of the ACA prohibited insurers from considering preexisting conditions when pricing policies. While this expanded access to coverage, it also significantly increased claims expenses for insurers, leading to higher premiums for consumers.
To make these higher premiums “affordable,” the government introduced subsidies based on household income. For example, if a family’s insurance premium was $1,500 per month, the government might cover $750, leaving the family to pay $750. While this sounds helpful, the reality is that taxpayers ultimately bear the cost of these subsidies, further adding to the national debt.
Hidden Costs in “Affordable” Insurance
Even with subsidies, many families face high out-of-pocket costs. For example:
Annual Deductible: $5,000
Co-Insurance Rate: 30%
Policy Maximum: $18,500
Only 20% of Americans can afford the out-of-pocket expense associated with an average health insurance policy. One major medical incident can quickly push a family into financial distress, making medical bills the number one cause of bankruptcy in the U.S. This highlights the need for more sustainable health care solutions.
Upcoding: A Common but Problematic Practice
Another issue driving up costs is upcoding, where medical providers inflate billing codes to charge more for services. For example:
A routine doctor’s visit might be coded as an extensive consultation, increasing the bill from $1,000 to $5,000 or more.
Why don’t insurance companies crack down on this? Because they benefit too. Insurers can only take a percentage of claims as profit, so higher claims mean higher profits for them. This symbiotic relationship between providers and insurers keeps costs high.
Consumers can protect themselves by requesting itemized bills to spot errors or inflated charges. Patient advocates, like Crystal Paulson, specialize in helping individuals navigate these complex bills.
Administrative Costs in the U.S.
The administrative overhead in the U.S. health care system is astronomical, accounting for up to 30% of claims — double the administrative costs in other developed nations. Much of this stems from the complexity of dealing with:
Multiple insurance systems (private, employer-based, Medicaid, Medicare).
Coding and billing regulations.
Automatic claim rejections, as seen in practices like Cigna’s machine-based rejections.
This inefficiency not only delays care but also adds unnecessary costs to the system.
Drug Costs: A Topic for Another Day
Drug pricing is another major driver of health care costs. While this topic deserves its own discussion, it’s worth noting that Americans often pay significantly more for medications than consumers in other countries. Many people resort to importing medications from places like Canada or Israel, where prices are more reasonable.
Conclusion
The U.S. health care system’s high costs are driven by a combination of systemic inefficiencies, profit-focused practices, and complex regulations. While there are no easy fixes, greater transparency, patient advocacy, and innovative health care models like Next Generation Health Care can help consumers navigate these challenges more effectively.
At the end of the day, it’s up to all of us to stay informed, challenge the status quo, and advocate for a more equitable and efficient health care system.
