September 2007
Why health care costs so much
The U.S. spends an average of $7,000 per capita on health care. According to a 2007 analysis by McKinsey Global Institute,
that's 28 percent more than any other industrialized country, even after adjusting for its relative wealth.
In the wake of the failure of managed care, no one is effectively reining in spiraling costs, say experts we interviewed.
"We have very high prices because people can get away with charging them," says David Blumenthal, M.D., director of the Institute for Health Policy at Massachusetts General Hospital. "In our decentralized, pluralistic system, no single purchaser has the market power or political authority to impose cost controls."
Insurers are no longer able to effectively negotiate prices with providers, but they make money anyway because they get a cut of premiums. Employers are paying more for insurance and are still passing on more costs to employees. Consumers who get health insurance from their jobs are neither selecting the plans to be offered nor made aware of how much they actually cost. (In 2006 the annual premium for family coverage averaged $11,480--more than the annual paycheck of a full-time worker earning the minimum wage.) And doctors, hospitals, and drugs are more expensive in the U.S. than anywhere else in the world.
It wasn't supposed to be this way. Back in the 1990s, employers and insurance companies embraced the idea that "managed care" could simultaneously save money and improve quality. Employees were put into HMOs, which in turn used their burgeoning membership numbers to force doctors and hospitals to cut their prices or lose access to patients. They also started telling doctors and patients they couldn't have all the care they wanted.
Breast-cancer patients sued and got some state legislatures to pass laws requiring health plans to cover $80,000 bone-marrow transplants (which were eventually proven useless, a topic we'll address more fully in a report in our November issue). And doctors and hospitals joined forces and, in many cases, successfully pushed back against managed care's demands for deep discounts to their fees.
Moviegoers cheered when, in the 2002 film "John Q.," Denzel Washington took an emergency room hostage to force his HMO to pay for his son's heart operation.
"Managed care effectively evaporated," says Gerard F. Anderson of Johns Hopkins. "Consumers wanted access to as many doctors as they could possibly get." The solution was the preferred provider organization, or PPO, which did away with the unpopular "utilization review" of HMOs.
"Insurance companies no longer had the ability to negotiate with a doctor or hospital because they couldn't throw them out of the system," Anderson says. "Prices for insurance took off."
In the wake of the failure of managed care, no one is effectively reining in spiraling costs, say experts we interviewed.
"We have very high prices because people can get away with charging them," says David Blumenthal, M.D., director of the Institute for Health Policy at Massachusetts General Hospital. "In our decentralized, pluralistic system, no single purchaser has the market power or political authority to impose cost controls."
Insurers are no longer able to effectively negotiate prices with providers, but they make money anyway because they get a cut of premiums. Employers are paying more for insurance and are still passing on more costs to employees. Consumers who get health insurance from their jobs are neither selecting the plans to be offered nor made aware of how much they actually cost. (In 2006 the annual premium for family coverage averaged $11,480--more than the annual paycheck of a full-time worker earning the minimum wage.) And doctors, hospitals, and drugs are more expensive in the U.S. than anywhere else in the world.
It wasn't supposed to be this way. Back in the 1990s, employers and insurance companies embraced the idea that "managed care" could simultaneously save money and improve quality. Employees were put into HMOs, which in turn used their burgeoning membership numbers to force doctors and hospitals to cut their prices or lose access to patients. They also started telling doctors and patients they couldn't have all the care they wanted.
Breast-cancer patients sued and got some state legislatures to pass laws requiring health plans to cover $80,000 bone-marrow transplants (which were eventually proven useless, a topic we'll address more fully in a report in our November issue). And doctors and hospitals joined forces and, in many cases, successfully pushed back against managed care's demands for deep discounts to their fees.
Moviegoers cheered when, in the 2002 film "John Q.," Denzel Washington took an emergency room hostage to force his HMO to pay for his son's heart operation.
"Managed care effectively evaporated," says Gerard F. Anderson of Johns Hopkins. "Consumers wanted access to as many doctors as they could possibly get." The solution was the preferred provider organization, or PPO, which did away with the unpopular "utilization review" of HMOs.
"Insurance companies no longer had the ability to negotiate with a doctor or hospital because they couldn't throw them out of the system," Anderson says. "Prices for insurance took off."
