In 2019 what’s the biggest driver of healthcare cost growth? If you answered prescription drugs I can’t blame you, as that has been the media’s focus as well as the President, Congress, and presidential candidates. The truth is far more complex. To paraphrase President Trump, “healthcare is complicated.”
Since 2015, the average pace of hospital and physician expenditures has exceeded prescription drugs. Together, as a percentage of the overall healthcare pie, hospital and physician expenditures account for almost six times the spending on prescription drugs.
Then there is the unexplained variance in hospital costs across regions and even intra-regionally, which the Dartmouth Atlas Group and the federal government have cited numerous times. In some instances, certain hospitals charge up to tens of thousands of dollars more for the same medical procedure than other hospitals. I have yet to see a plausible, comprehensive explanation for the extreme variation in hospital costs.
Reviewing a hospital bill of a family member who was recently hospitalized, what was most eye-popping was not the cost of the administered medicines, nor the lab work, but the $4,500 a night “room and board charges” (mind you, this was not even a private room). The obscurantism contained in the bill was mind-boggling; references to deductibles, contractual adjustments, deductions, discounts, insurer portions, and “what the patient owes” and “this is not a bill” reminders concealed more than they illuminated. I have a working knowledge of the terms included in the hospital bill, so I kind of understand it. But, the typical patient does not.
The average price of a night in the hospital is six times higher in the U.S.than in Australia. Even when compared to similar multi-payer healthcare systems that have a dominant private component, such as Switzerland, hospital costs are still significantly higher in the U.S.
Are higher hospital costs justifiable? Certainly, the typical fixed costs, such as amortization, depreciation, utilities, and the salaries of doctors, nurses, and hospital administrators are not six times more in the U.S. than Australia. Conventional wisdom suggests that it may have something to do with hospitals being stocked with and using more expensive medical technologies in the U.S. Well, yes. This may be a partial explanation. U.S. patients use about two-and-a-half times more sophisticated diagnostic imaging technology than the Organization for Economic Cooperation and Development (OECD) average, specifically per capita rates of magnetic resonance imaging, computed tomography, and positron emission tomography. But, this surely doesn’t account for the vast differences in hospital stay costs. Indeed, across the OECD there isn’t a correlation between intensive use of certain medical technologies and higher hospital costs. Take, for example, Japan, where the hospital inventory and rates of diagnostic imaging are greater than the U.S., yet, hospital stay costs are cheaper.