In what ways is the US healthcare system inefficient? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
Let's start with the basic numbers. The US spends 17.1% of GDP on healthcare, that's a cool three trillion dollars a year. For comparison, the global mobile advertising market - that's the market that gives companies Facebook and Google pretty much all their valuation - is $100 billion per year, the global handset market is $400 billion per year. In other words, a mind-bogglingly large number.
But, well, it's our health, so it might be worth spending that amount of money. However, Germany spends 11.3% of GDP on its healthcare system (and everyone is insured throughout his or her whole life), Switzerland spends 11.7% of GDP, France 11.5%, Japan 10.2%. In fact, you won't find another developed country that spends more than 11-12% of GDP on healthcare. If you plot this against life expectancy, people in the US die earlier than in all those countries I just listed, and we somehow manage to spend 50-100% more on healthcare per GDP than any other rich country in the world. And we leave 10% of our population uninsured, while we're at it. Right then and there, you see the absolutely incredible inefficiencies of our healthcare system. There might not be another economic system on the planet that is as dysfunctional with regards to what is "normal" operations, as the US healthcare system is vs. the rest of the rich world. By the way, that translates into about a trillion dollars per year in over-allocation of dollars. As you know (and it's an issue in this election, at least indirectly), real wages haven't grown very much in the US since the early 2000s or so, and it's at least partly because some of the real wage growth that could have existed has been eaten up by rising healthcare costs. So it is an incredible issue. One that has often been shielded from you and I - because your employer picks up the tab of rising healthcare premiums before you even know it; but the average person sees it, among other ways, in the fact that incomes have been depressed because so much of our national income generation goes to healthcare. In the 1960s, I think 5% of GDP went to healthcare.
So why is that the case? There aren't any extremely simple answers, but we know of a few that are very clearly big drivers. I like to break down our internal calculations around healthcare costs into three components: (risk / member) x (utilization / risk) x (unit cost / utilization) (let's call it R x U x C). "Risk" in health insurance terms is a codeword for the set of medical conditions that a member has. What this translates into: for someone with a certain medical condition (R), how much does this person utilize healthcare (U = go to the doctor, go to the emergency room, get surgery, get drugs etc.), and then per each unit of utilization, what does it cost (C, that's unit cost).
If you compare those three components across countries, then you see that the US is slightly less healthy than other rich countries (we have more of an obesity problem, we like to shoot each other more with guns, we don't eat as healthy as the French), so that's a slight problem in R. You actually wouldn't see much of a difference in utilization - we go to the doctor similar amounts of time and have a similar number of colonoscopies as people in Europe, for example. And you would see a massive difference in unit cost, which is almost where you can entirely isolate the problem: we have a huge issue with unit costs. Some of those stories you're probably very familiar with, e.g., the insanity of drug pricing (see the Epipen example). In New York, the same procedure can cost 2-3x more, depending on which hospital you go to - with, and this is extremely important, no difference in quality! In fact, healthcare might be the only one of our big "markets" in which there is no correlation between price and quality.
So what is happening with unit costs? I think there are several things at work:
- Unlike in other countries across the globe, the US government doesn't set reimbursement levels for healthcare procedures. (That's what Germany does, for example.) So everyone is free to set their own price.
- There is no transparency on unit costs across providers: even though a doctor or a hospital might charge "you" (we'll get to why I put that in quotes in a second) a factor of 3x for what the doctor next door would charge you, you have no idea that that is the case, because you can't really ask doctors and hospitals for what they will charge you.
- There really isn't any competition between providers of medical services. Insurers build "networks" of doctors and hospitals largely by going to everyone in a city and asking them what their price is, then negotiate that down a bit. Because everyone will be in that network, and because largely every actual cost will be replaced by the insurer by a flat co-pay towards you, you actually have no idea whether you're getting good value for money, because you have no idea what the "system" as a whole ended up paying for that transaction that you just did. Providers therefore essentially have gotten used to a world in which everyone can raise prices by 5-10% every year, and in which insurers largely mark up those rising unit costs by a constant 15% administrative margin, and in which this then all gets passed on to us.
- But who is "us" in this sentence? That's where the final issue comes in: it's usually your employer. Most of us have no idea how much the cost of healthcare has gone up, because the bill has been footed by the employer, and then passed on to us over time in the form of rising premiums. That the rising premiums are coming down to a constant creep of unit costs is not something we can ourselves discover in any of the day-to-day transactions we experience ourselves in the healthcare system.
There are many other issues, but they tend to be similar across other nations: for example, that there isn't often any centralized "orchestration point" in the system (nobody watches you and checks if you're staying on the right path that will keep you healthy, even if you just had a surgery); providers tend to get paid not for outcomes, but simply for services that they put on a bill (so the actual incentive is to get you back into the office more, not make you healthy - which conflicts with the vast majority of providers' fundamental drive towards getting you healthy, not just charging you money); data flow is very poor across the system, etc.
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