Reasons Healthcare Is So Expensive in the U.S.
Author: The investopedia team
“6 Reasons Healthcare Is So Expensive in the U.S.” Investopedia, https://www.investopedia.com/articles/personal-finance/080615/6-reasons-healthcare-so-expensive-us.asp. Accessed 23 Feb. 2025.
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6 Reasons Healthcare Is So Expensive in the U.S.
Healthcare is often very expensive, especially for Americans. There are many factors contributing to the high cost of healthcare in the U.S., including wasteful systems, rising drug costs, medical professional salaries, profit-driven healthcare centers, types of medical practices, and health-related pricing.
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Healthcare is often very expensive, especially for Americans. There are many factors that contribute to the high cost of healthcare in the country including wasteful systems, rising drug costs, medical professional salaries, profit-driven healthcare centers, types of medical practices, and health-related pricing.
Key Takeaways
Drug prices, professional salaries, and hospital costs are much higher in the U.S. compared to other countries.
- Americans pay almost four times as much for pharmaceutical drugs as citizens of other developed countries.
- Hospitals, doctors, and nurses all charge more in the U.S. than in other countries, with hospital costs increasing much faster than professional salaries.
- Prices for drugs and healthcare are partially controlled by governments in other countries, while prices depend on market forces in the U.S.
Healthcare in the United States
U.S. healthcare is market-driven, leading to expensive insurance and care, unlike other nations with controlled systems.
The majority of Americans rely on private health insurance for coverage. Statistics show that 91.4% of the American population had coverage in 2022, much less compared to 99% to 100% of the population in other industrialized countries having healthcare coverage.
Most of the costs involved in the U.S. healthcare system are market-driven. This results in high, unregulated prescription drug costs and higher healthcare providers' salaries in contrast to other Western nations. However, as salaries for American workers have risen, net pay remains the same due to the increasing cost of health insurance.
Other factors include spending for hospital care, which is expected to increase by 5.7%. Administrative regulations regarding billing and coding also add to an individual's cost.
1. Multiple Systems
The variety of insurance plans and regulations makes the system unnecessarily complicated and costly.
The U.S. healthcare system is highly complex. There are separate rules, funding, enrollment dates, and out-of-pocket costs associated with the various forms of health insurance, whether it's employer-based, private insurance, or government-provided plans like Medicaid and Medicare.
Consumers must choose among several tiers of coverage from these options. They include high deductible plans, managed care plans, and fee-for-service systems. These plans may or may not include pharmaceutical drug insurance with its tiers of coverage, deductibles, copays, or coinsurance.
For providers, this means dealing with myriad regulations about usage, coding, and billing. These activities make up the largest share of administrative costs.
Administrative costs are frequently cited as a cause for excess medical spending. According to statistics, healthcare costs in the United States exceed those in other developed nations, and these costs include those related to the administration of these systems. These expenses translated to $1,055 per person in 2021.
The average life expectancy at birth in the U.S. for both genders is 79.5 years. Men are expected to live until 77 years while women have a life expectancy of 82.
2. Rising Drug Costs
The lack of regulation allows drug companies to set high prices, significantly raising U.S. spending on prescriptions.
Americans shell out, on average, almost twice as much for pharmaceutical drugs as people in other industrialized countries. High drug prices are the single biggest area of overspending in the U.S. Compare that to Europe, where drug prices are government-regulated and often based on the clinical benefit of the medication.
In the U.S., private insurers can negotiate drug prices with manufacturers, often through the services of pharmacy benefit managers. However, Medicare, which pays for a hefty percentage of the national drug costs, is not permitted to negotiate prices with manufacturers.
Price and usage contribute to the higher cost of medication in the U.S. With little regulation in pricing, Americans in 2022 spend an average of $963 on prescription drugs per person, compared to an average of $466 spent by other prosperous countries. More adults in the U.S.—as many as 58%—reported taking one or more drugs on a consistent basis.
Prescription drug spending is continuing to grow, with expected spending in 2024 at a striking $463.6 billion.
3. Higher Salaries for Medical Professionals
U.S. salaries for doctors are high compared to other countries, adding to overall healthcare costs.
The average annual salary for a family doctor in the United States was $239,200 in 2023. Emergency room physicians commanded an average annual salary of $306,640. That's much higher than the average in other industrialized countries, including Germany ($183,000), Canada ($194,777), and the United Kingdom ($138,000).
However, American nurses do not make more than most developed nations. The average salary for a U.S. nurse is about $86,070, while in Switzerland, they can make up to $90,000, or even Luxemborg where nurses can make $87,000 annually.
The U.S.-managed care plans may succeed in lowering healthcare costs by requiring prior authorization for seeing a high-priced specialist. Using a nurse practitioner instead of a family doctor can also save money.
Managed healthcare plans include health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
4. Profit-Driven Hospitals
The profit model drives up hospital prices, with procedures costing far more in the U.S. than in other countries.
Hospital care accounts for a significant portion of the nation’s healthcare costs. Expenditures in this category are projected to grow 5.7%. This figure includes COVID-19 relief.
Prices in the United States remain high for inpatient services compared to other countries, according to a report released by the Health Care Cost Institute in July 2022. For instance:
- A hip replacement was $28,167 in the U.S., compared to $16,622 in New Zealand, which was the next most expensive.
- Patients paid $11,326 for a C-section in the U.S. The next highest cost was $7,948 in Switzerland.
5. Defensive Medical Practices
Both physicians and hospitals have an interest in preventing lawsuits so that “just in case” tests and scans may be ordered. These tests are incredibly costly for a patient. Consider these statistics from 2022:
- The average cost of an MRI in the U.S. was $580, second to New Zealand's $819, though higher than the $120 paid for in Spain.
- A CT scan in the U.S. cost $553 compared to $78 in Spain. Keep in mind that it is higher in New Zealand and South Africa, where these tests cost $655 and $576, respectively.
Researchers state that it’s not just the sheer number of tests and procedures, but their high price, that explains why it’s so expensive to be sick in the U.S.
6. Varying Healthcare Prices
Prices vary greatly depending on the location and type of insurance, making costs unpredictable.
Because of the complexity of the system and the lack of any set prices for medical services, providers are free to charge what the market will bear. The amount paid for the same healthcare service can vary significantly depending on the payer as well as the coverage, ranging from private insurance, government programs, and Medicare or Medicaid. Geographical areas can also have a significant impact on the cost. For instance, services may cost more in metropolitan centers, like New York, compared to more rural areas, like Salt Lake City.
What Type of Healthcare System Does the United States Have?
Healthcare in the United States is very complex. Unlike many developed nations, it doesn't provide its citizens with universal healthcare. Instead, the healthcare system is mixed. The majority of individuals rely on private healthcare provided by their employers or through healthcare exchanges, while some individuals have access to public plans that are subsidized by the government.
Why Doesn't the U.S. Have a Universal Healthcare System?
Debate over universal healthcare centers on cost and feasibility, with no consensus on how to fix the system.
There isn't one definitive way to answer that question. The idea of implementing a universal healthcare system in the U.S. has always been a big topic of debate. Those who support it state that it would cut down costs, improve life expectancies, and reduce instances of chronic illnesses like heart disease and diabetes. Critics suggest that the population is too large and diverse to fall under one system, which require major upfront costs to startup.
What's the Difference Between Medicare and Medicaid?
Medicare is for older adults, while Medicaid serves low-income individuals, but both have different structures and eligibility.
Medicare is a federal health insurance program that is meant for retirees—people 65 and older—and individuals with certain disabilities. The program is operated by the Centers for Medicare & Medicaid Services. The program comes with set costs, which means that coverage is streamlined for individuals regardless of where they live.
Medicaid is a program run jointly by states and the federal government. It provides medical coverage for lower-income individuals. Eligibility requirements vary by state.
The Bottom Line
Unlike other countries, the U.S. lacks government control over healthcare pricing, keeping costs high.
Most developed countries control healthcare costs through government intervention. As such, their systems don't require the high administrative costs that drive up pricing in the U.S. These governments can negotiate lower costs for drugs, medical equipment, and hospital care. They can also control how patients get treatment.
The lack of political support in the U.S. for such a system keeps the government from controlling healthcare costs, which drives prices up. Having said that, it's always a good idea to your research to find the best health insurance coverage to suit your needs.
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