Why America pays so much more for health care than other nations
The United States spends twice as much per person as other wealthy countries on health care. People often point out that the governments of other developed countries leverage purchasing power to drive cheaper, more universal care. Why doesn’t the United States do the same thing?
Because we can’t. In fact, the world’s other health-care systems can only because they receive a massive and ongoing, but hidden, subsidy courtesy of the inefficient U.S. system — they transfer the risk and cost of medical innovation to Americans.
Once Americans have borne the costs of lifesaving breakthroughs as well as incremental improvements in tools and techniques, these can be used elsewhere at little extra cost.
American exorbitance allows other nations to offer price-controlled universal care with none of the decline in quality, technology or productivity that would otherwise result from central planning.
The size of the U.S. healthcare system is almost impossible to overstate. With barely four percent of the world’s population, the United States accounts for almost half of the world’s $8 trillion health-care economy.
England’s National Health Service is tiny by comparison — barely bigger than U. S. Veterans Affairs health system funding. Canada’s total spending is comparable to the revenue of a single American company, United Health. Free-market star Singapore spends only as much as New Jersey’s Medicaid program.
This is why all health-care innovators -— makers of drugs, devices, diagnostics, medical software — share the same business plan: Make money in the United States and take whatever scraps you can get in the other markets.
The pharmaceutical industry earns almost 50 percent of its worldwide revenue here, as do medical information-technology firms. Device makers earn 40 percent of their money in the United States. And this understates things, because U.S. revenue is generated from higher prices, so margins are greater. If the United States accounts for half of a company’s revenue, it probably contributes at least 75 percent of its profits.
Consider the well-known miracle drug Gleevec. Before it came along in 2001, less than 30 percent of patients diagnosed with chronic myelogenous leukemia survived at least five years; today, 90 percent do.
Gleevec is also a poster drug for American dysfunction. Novartis steadily raised its price in the United States — even after its patent expired -— to eventually reach more than $123,000 per year in 2020.
Yet, in Canada, Gleevec was priced at $38,000. A generic version in India now costs just $400.
Drugmakers and their opponents argue over the “fair” returns on innovation that companies need to maintain their incentive to invest in new medicines. Critics point to the share of pharma’s profits that come from barely legal anticompetitive behavior or from drugs created with heavy public support — such as the U.S. government’s $12 billion investment in coronavirus vaccines.
But enormous returns on a few blockbuster drugs compensate for drugmakers’ many unsuccessful products.
That’s the business model, and these big, “unfair” returns are available only in the United States.
If the world’s largest health economy limited drug companies to “fair” returns — as other countries try to — few new drugs would be created. The United States doesn’t pay $123,000 a year for Gleevec despite Canada paying only $38,000. Canada can pay $38,000 only because the United States pays $140,000.
Why? In the United States, the prices charged by hospitals and doctors are unrestricted. American physicians earn roughly two to three times as much as their counterparts in western Europe.
Hospitals charge two to five times as much for their services.
Why doesn’t competition bring U.S. health-care prices down? The answer: America’s stagnant third-party payment system allows hospitals and doctors to avoid competing on price. Instead, they compete on innovation. This is why hospitals advertise advanced, hightech cancer therapies; surgeons build reputations for cutting-edge procedures; and even your family physician must invest to keep up.
The only way to lower U.S. health-care costs is to rethink the system’s top-down policy structures that rely on huge, centralized payers. We need more sensible economic structures that introduce the competition necessary to bring prices down.
What’s needed is a way to separate the safety net function that insurance provides from consumer decision-making. If insurance covered only major and unanticipated health problems, a consumer economy could drive competition in the rest of the system. This would give doctors and hospitals an economic incentive to bundle services, enhance efficiency, reduce waste and offer genuinely “valuedriven” care.
In this century, the world has seen the democratization of many services considered “too complicated” for consumers — computers, finance, international travel, furniture construction, you name it.
All this happened because people had enough control over their own spending to drive competition among innovators. It’s how industry managed to put supercomputer power in everyone’s pocket, while reducing price by 99 percent.
Until the same kind of competition is introduced in health care, the U.S. system will continue to subsidize the world — and cost us a fortune.