The Affordability Crisis: Fixing Health Care

In 2024, the U.S. spent almost $15,000 per person on health care, about 17 percent of GDP. Peer countries spent much less ($6,000 to $10,000 per capita) even though our health care system under-performed those countries on many indicators of effectiveness.  Excess health care spending in the U.S. relative to peer countries was 2 to 3 times larger than our total spending on core national defense of $3,000 per person. Fixing our health care cost drain could help fund essential social benefits such as pre-K childcare, debt-free post-secondary education, long-term care for dependent seniors, and housing subsidies for lower income people, as well as making it easier to achieve universal health insurance coverage.  

Peer countries with lower health care costs routinely provide these popular social benefits while typically running smaller deficits and accruing less national debt than the United States.   These social benefits are critically important in addressing the affordability crisis for working- and middle-class families as inflation for housing, education, and health care rises faster than household income.

Can we tax our way to more adequate social benefits?

A common misconception is that peer countries with more generous social benefits pay for them entirely by levying higher taxes or by running larger deficits.  This misconception leads to a faulty conclusion that large tax increases or increased national debt will be inevitable if social benefits are enhanced.  But comparing taxes and spending in the United States with peer countries does not show that we pay less for social benefits—we just get less for what we spend.  

Comparing U.S. taxation for social benefits, we need to account for uniquely American private expenditures.  In 2002, Jacob Hacker compared U.S. health, education, retirement and social welfare spending to peer countries. He found that U.S. tax collections (local, state and federal combined) were notably lower than peer countries.

But when private expenditures by businesses and individuals were combined with public spending, total U.S. expenditures on health, education, retirement, long-term care and social welfare as a percent of GDP were similar to countries such as the United Kingdom, Norway, Germany, Canada, and the Netherlands.  The U.S government spends less on social welfare and long-term care benefits  and similar percentages of GDP on retirement and education. But the U.S. spends much more on health care than any other peer country.

Using more recent Organization for Economic Cooperation and Development (OECD) data, we updated these analyses (see figures below).  In 2023, U.S. tax collections at all levels of government amounted to 26 % of GDP, substantially lower than peer countries where taxes were 34% to 46% of GDP. 

But total spending on health, education, retirement, long-term care and social welfare was comparable to many peer countries when public and private dollars were combined. U.S. spending on social benefits was greater than Japan, Canada and the U.K., similar to the Netherlands and Norway, and only somewhat lower than France, Germany, Denmark and Finland. The way U.S. benefits for health care and retirement are structured disproportionately advantages those with higher incomes, exacerbating our affordability crisis among working- and middle-class Americans, and amplifying inequities in access to essential services.

Advocates for increased taxation to enhance U.S. social benefits often ignore the large payments for health, retirement, education and long-term care services already made by employers and individuals.  Without reducing health care spending, increasing social benefits to levels comparable to peer countries would likely increase overall U.S. spending on social benefits (public and private combined) from 42% of GDP to over 48%.  This would increase spending to levels comparable to Denmark, Finland and France, and exceed current spending on social benefits by the U.K., Canada, Japan, Netherlands, Germany and Norway. 

The political feasibility of achieving such large increases in social benefits spending without controlling health care costs is questionable, given that current overall spending on social benefits is similar to peer countries with more generous benefits.  Moreover, our partially privatized social welfare state pressures the budgets of households and businesses, which reduces public support for increasing taxes.

What causes our excessive health care costs?

The primary cause of higher U.S. health care costs is not greater use of health care.  The U.S. has fewer physicians, nurses and hospital beds per capita than most peer countries, and fewer health care visits and days spent in hospital.  

Rather, it is higher prices for hospital care, surgical procedures, prescription medicines, and health care visits that drive higher costs, along with the dysfunction and inefficiencies in how we administer health care payments.  

According to the Commonwealth Fund, higher U.S. health care costs are due to administrative complexity, fee-for-service billing, higher prices for hospital care and prescription medicines, and higher compensation of medical specialists and nurses.  

To control health care costs it will be necessary to fix how we pay for health care, and to counterbalance the power of hospitals, drug companies, and health care organizations in setting health care prices.  

Is price transparency and competition the answer?

Some hold that increasing price transparency and unleashing market forces could lower health care costs by informed patients seeking out lower cost health care.  The belief that increased competition can lower health care prices is based on the faulty assumption that patients purchase health care. In general, patients use health care, but government and private insurance plans buy that care.  Only government, working in tandem with other insurers, holds the market power and information needed to meaningfully lower prices.  

Competition and price transparency for patients can lower costs of some kinds of elective care, such as laser eye surgery, but such opportunities are not typical. For most care, it is difficult for patients to be able to define actual clinical quality of care let alone compare quality and costs across providers. There may not be alternative sources of care, many patients feel dependent on physicians for guidance about complex health care decisions, and no one is able to tell patients what care is going to cost in advance unless it is a simple test or procedure.

Is non-profit health care the answer? 

Some argue that for-profit health care is the cause of high health care costs.  However, research comparing for-profit and non-profit hospitals hasn’t found meaningful differences in costs.    Experience suggests that non-profit health maintenance organizations have generally not chosen to compete assertively on the price of health insurance.

States with predominately non-profit health insurance plans (.e.g. Massachusetts) do not necessarily have lower costs than states in which for-profit insurance plans predominate. That said, research has found health insurance premium price spikes in markets in which a large non-profit health insurance plan converts to for-profit, but premiums spiked across all insurers in those markets regardless of non-profit status. 

The state of Minnesota, which has largely non-profit health insurance plans and hospitals, does appear to have lower health care costs, but not as low as peer countries that give real power to government and non-governmental health insurance plans to negotiate prices for hospital care, surgical procedures, tests and medicines.  

Fixing the health care cost drain

There are three root causes of high health care costs in the United States: 

1. Fee for service billing which is complex and expensive to administer, and which incentivizes charging the highest volume of codable services and particularly the production of higher cost services such as surgical procedures. 
2. The diffusion of purchasing power across multiple insurance plans while limiting the role of government in negotiating the prices of hospital care, health care visits, procedures, tests and drugs. 
3. The lack of meaningful accountability of hospitals, health care organizations, and physicians for overall costs of care through mechanisms such as global budgets, salaried compensation of physicians, capitated payment for care management, and price schedules that reflect benchmarking to production costs achieved by efficient providers within the United States or elsewhere.   

Within the United States, there is successful experience addressing these root causes.  The Mayo and Cleveland Clinics employ only salaried physicians to foster teamwork, to emphasize quality over volume of care, and to preclude conflicts of interest.  The Veteran’s Administration and Kaiser Permanente use global budgets for their hospitals, have salaried physicians and do not use fee-for-service billing for services they provide.  

Medicaid plans in Washington (Apple Health) and Oregon (Oregon Health Plan) assertively manage costs of care while providing high-quality health care to large populations. And the federal government has started benchmarking prices paid for some drugs to prices paid in peer countries.   We need to apply lessons learned about controlling health care costs in these settings, and in peer countries with less costly care, to reducing U.S. health care costs generally. 

The ability to control health care costs is ultimately a matter of political will as public demand for affordable, accessible health care needs to be reconciled with the powerful economic interests of hospitals, drug companies, physicians and allied health professionals, and health insurance organizations.     

Fee-for-service billing increases administrative overhead and incentivizes unnecessary and higher cost services.  It enables health care organizations to increase prices above reasonable costs.  Prices paid for procedures, drugs, tests and hospital episodes should be scheduled so that prices are transparent to purchasers (i.e. government and insurance companies) with all purchasers paying similar prices.  This is done routinely in other countries.  

The role of government in negotiating prices is critically important.  In most states with multiple insurance plans, individual private health insurance plans (let alone individual patients) do not have the market power to influence prices in their service areas.  Government, which purchases about half of all health care delivered in the U.S., has until recently been constrained by law and regulation from exercising its market power to lower health care prices, Recent initiatives by both political parties to enable government to negotiate drug prices and some kinds of hospital care have been popular but limited in scope.

Assertive governmental price negotiation for hospital and surgical care, and mandating transparent and uniform pricing across payers, has been a bridge too far for most politicians and regulators, who often prefer to focus on “waste, fraud and abuse” in their meager efforts to reduce health care costs.    Governmental and non-governmental insurers should negotiate assertively to lower prices on behalf of the public-at-large, rather than ceding undue influence to the health care industry in determining how services are paid for and what they cost.  

About 30% of U.S. physicians do not accept Medicaid payments and 15% do not accept Medicare.  As high health care costs are controlled, new policies may be needed to ensure that larger numbers of physicians do not retreat into concierge medicine for wealthy private-pay patients.  Policy options might include continuing trends toward equalizing Medicare and Medicaid payments, but requiring physicians and ambulatory care clinics who accept Medicare patients to also accept their fair share of Medicaid patients.

Medical education debt of recently trained physicians might be paid off in exchange for agreeing to accept both Medicare and Medicaid patients. The non-profit status of hospitals might be evaluated based on ensuring that most physicians with admitting privileges accept both Medicare and Medicaid reimbursement.  The tax treatment of clinical revenues from private pay patients might also differ from taxation of revenues from public insurance.

As we move away from fee-for-service reimbursement and variation in reimbursement rates across insurance plans, the resistance of some physicians to accepting Medicaid and Medicare reimbursement is likely to dissipate.            

Peer countries with lower health care costs than the U. S. uniformly use the power of government and large health insurance plans to negotiate prices of hospital care, medicines, surgical procedures and tests.  They also make greater use of global budgets for hospitals, bundled payment for hospital care rather than open-ended billing, and salaried or capitated compensation of physicians. Incremental changes in how hospitals and providers are paid can, over time, make it easier to control health care price inflation, although peer countries struggle with health care cost inflation as well.

Overcoming opposition of special interests

Unleashing government and non-governmental insurance plans to assertively negotiate lower health care prices would, of course, be vigorously opposed by the health care industry. But, if initiatives to lower prices of hospital care, tests, surgical procedures and drugs were successful, it could eventually free up significant funds for other social needs, perhaps amounting to 4 to 5 percent of GDP.  

Reducing health care costs would also reduce budgetary pressures on government, employers, and families due to the high costs of health insurance premiums and the costs of deductibles and co-pays borne by individuals.  

It is unlikely that increased taxation alone can fund the full range of popular social welfare benefits that people in peer countries enjoy as a matter of course.  The U.S. is already spending as much, in aggregate, on health, education, retirement, long-term care, and social welfare benefits as many peer nations with more comprehensive social welfare benefits, but we do not reap the same rewards from our high spending levels.  

With growing public recognition that our health care costs are too high, and that our health care services do not achieve outcomes as good those in peer countries, politicians and regulators may stiffen their resolve to tackle the forces that make U.S. health care uniquely expensive. 

If so, controlling health care costs (in combination with rolling back recent tax cuts for the wealthy and tackling wasteful spending on national defense) could help expand essential social welfare benefits that can make childcare, education, housing, retirement and long-term care more affordable for average Americans.