Health care has become increasingly expensive as technology and treatments have improved. The growth in the cost of healthcare has outpaced the GDP for more than 30 years. Topping $2T in 2010, healthcare consumes 17% of the US GDP and seems headed for 20%. Other advanced nations spend 10% of their GDP on healthcare.

Treatment of chronic conditions has improved to the extent that more people than ever are living with long term treatment of what in the past were fatal conditions. Malpractice standards and litigation have raised the cost of care and created an environment in which doctors practice “defensive medicine.”  Doctors order tests and prescribe procedures which they might not without the threat of litigation.

US healthcare is more expensive as a percentage of the GDP than healthcare in other OECD countries, nearly all of whom use some sort of “single payer” system.  Individual medical procedures are more expensive in the US than in other countries creating a practice of medical tourism by US citizens to places like Mexico, Costa Rica and India for cheaper procedures.  This provides a direct contrast with the practice of wealthy foreigners coming to the U.S. for easy access to premium care. In 2010 ten times as many Americans went abroad for treatment than foreigners came to America.

On average, US healthcare outcomes are at the bottom of the top tier globally primarily because of uneven access to care; however among those with full access, the US standard of care is world class. Additional treatment options have raised all sorts of new ethical issues. Those affecting life and death are the most difficult (e.g. abortion and euthanasia) with organ donations creating more havoc.

Payment through private and public insurers has become problematic, expensive, and the target of regulation.  Insurance companies consume 20% of their budgets in administration and profits with 80% or less of their income going to medical payments. The ACA targeted this 80% number by requiring insurance companies to refund any premiums they collected in excess of 125% of their medical payments. Government programs like Medicare typically transfer over 95% of their budgets to medical payments, but the DHH which administers Medicare is not charged for the cost of collecting taxes, the IRS pays that, nor is it charged for the cost of capital (which shows up as profit in private companies).

Compounding the growth rates reveals that national healthcare spending is 11 times what it was in 1980. Inflation since 1980 has been 272% so real growth of healthcare costs is 400%. The population is 40% higher than it was in 1980 making the real dollar per person increase in medical costs 288%. Life expectancy is up from 73.7 to 78.2 years. Another way to put it is that each of us is paying triple what we paid in 1980 for healthcare products and services.  Why isn’t the US healthcare market working?  Did something change that by the 1980’s began to affect the market?

Employer paid health insurance was not popular before WW II. Between 1940 and 1950 health insurance coverage exploded from 20 million to 142 million insured. The first bump came when Roosevelt exempted “fringe benefits” from WW II wage controls and then the second came under Truman when politics favored employer funded health insurance over a public (government) plan and memorialized it in the tax code.  Medicaid and Medicare were introduced in 1965. By 1980 the vast majority of Americans no longer bought their healthcare from doctors and hospitals, they bought it through insurance companies, or their employer or government provided insurance for them.  No one, especially the insurance companies had the slightest motivation to shop for the lowest cost.

One economist observed,” A common lament is that we don’t know how to control costs. That’s false. Other nations with broad health programs have a much better track record than we do, and even the Medicare program has controlled costs better than the private sector. These experiences suggest that a big reason health care in America is so expensive is that there’s too little countervailing power in the markets for health insurance and health services.”

“Insurers, pharmaceutical companies, device manufacturers, doctors and hospitals are all able to drive up prices with limited pushback. On the one side, insurers have virtual monopoly power in many markets. Without serious competition for their business, they often have little incentive to contain costs. On the other side, providers of health care services have enormous market power in many local markets. Without insurers jawboning them to bring down rates and improve efficiency, they continue to charge too much and operate without proper economy.”