RTRP Health Care: What’s Wrong With Our Health Care System, Out-of-Control Costs

The United States health care system costs too much and achieves too little. Seven out of ten Americans say the system needs “fundamental change” or must be “completely rebuilt.”

Before we can talk about repairing the system, however, we must first understand what is wrong with the system. The problems with the American system fall into three broad categories: (1) out-of-control costs, (2) access to health care, and (3) quality control. Today we talk about out-of-control costs.

In 2007, Americans spent $2.26 trillion dollars, or $7,439 per American, on health care. This works out to 16% of our gross domestic product (GDP) -- more than double the 7.2% of GDP spent in 1970 and more than any other country spends (except the Marshall Islands). Most European countries spend between 9-10%. And every year, these costs continue to grow, far in excess of inflation or wage growth. This is the core problem at the heart of our health care system.

Following are some facts that you need to know to understand this problem:

• Medical Advances: Half of the growth in health care spending over the past decade has been the result of medical advances.

• Overhead Costs: According to Harvard Medical School, 31% of health care spending goes to pay administrative/overhead costs (this is nearly double the 16% percent spent in Canada). A reduction to even Canadian levels would save Americans $339 billion annually.

• Medically Unnecessary Procedures: It is estimated that $500-$700 billion is spent annually on treatments, tests, or hospitalizations that do nothing to improve health. Studies have shown a direct relationship between the amount of tests/procedures ordered and the availability of such tests/procedures in the local area, even though such increased testing/procedures do not result in improved care. Moreover, where doctors are paid for level of care provided, rather than results obtained, they order more care whether or not it is medically helpful.

• Prescription drugs account for 10% of total spending. The government pays for 34% of these, private insurance for 44% and individual consumers for 22%. Prescription drugs are the most rapidly growing portion of health care costs in the country, though recent shifts to generic drugs are reversing this trend.

• Hospitals provided $35 billion worth of uncompensated care (for the uninsured) in 2008. 80% of this was reimbursed by the government.

• Malpractice Insurance: The legal system is often blamed for causing medical costs to skyrocket. This is not true. According to the CBO, effective tort reform could reduce the cost to physicians of malpractice insurance by as much as 25 to 30 percent. BUT, the overall savings to the health care system would be a minuscule 0.5% (roughly $11.3 billion).

• A 1996 study found that 1% of health care users accounted for 27% of the total spending on health care.

Thus, effective reform must (in order of importance) do the following:

1. Reduce the costs of medical innovation, without reducing the incentive to innovate.
2. Decrease the amount of medically unnecessary procedures/tests.
3. Decrease administrative costs.
4. Reduce the costs of care required by the top 1% of users.
5. Reduce the growth of prescription drug costs.
6. Decrease the amount of uncompensated care.
7. Reform the legal system to reduce the costs of malpractice insurance.