The US is spending is 18%,of GDP on healthcare compared to around 11% for the comparable country averages, thanks largely to hospital and physician pricing power, overtreatmentmedical fraud and misguided tax incentives. If we had the political will, we could reduce healthcare spending to 15% or less of GDP while achieving universal healthcare coverage. For more on that, click here .

This post was inspired by someone yelling at me that insurance and drug companies were responsible for high healthcare costs in the US and if we just had a single-payer system, the cost issue would just go away.

Here are three tables that tell most of the story.

_2019 Healthcare Spending by Source.png

Ok, now for what all that money is being spent on:

_2019 Healthcare Spending by Type of Expenditure.png

Note that more than half of the healthcare dollar is spent on hospitals, physicians, and clinical services. That’s where you see lots of the overtreatment, overpricing, and medical fraud. Prescription drugs are just 10% of US healthcare spending. Sure, let’s figure out a way to cut the price of drugs (without discouraging innovation and investment in R &D) but cheaper drugs will hardly make a dent in overall spending.

As for the “net cost” of private health insurance, that’s the cost of insurance less paid healthcare benefits - aka administration, taxes, and profits. These net costs seem pretty steep but looked at more closely, they’re not so bad. For one thing, taxes go into the government’s coffers and the insurance industry’s profits are rather modest - just 2.4% in 2017.

And then you have to account for how much private insurers save in comparison to their government counterparts. Economists have estimated that private plans “provide better-quality medical care at 10% less cost” than the Medicare system. Private insurers also lose much less to medical fraud than Medicare and Medicaid, with a fraud rate of perhaps 1 to 1.5 percent compared to around 10 percent for Medicare and Medicaid. In other words, what private health insurance “takes” in the form of profits and higher administration costs it gives back - and then some - in more cost-effective medical care. Once we take this savings premium into consideration*, the net cost of private health insurance seems rather reasonable:

_2019 Healthcare Spending by Private Insurance.png

For the record, the government’s administrative cost of $45 billion is 2.7% of public healthcare expenditures (Medicare, Medicaid, and Other Programs). Then again, Medicare lost an estimated $52 billion to medical fraud in 2017 - more than three times the insurance industry’s profits that year. The government could do a lot better at preventing medical fraud. But that would mean spending more on administration.

* I used a low-ball estimate of the savings premium in the table, since there may be some overlap between savings due to fraud prevention and savings due to superior care efficiencies.

Links and References:

Accident & Health Insurance  Pre-Tax Profit Margins:

Behind The Headlines: Private Healthcare Plans Pay Hospitals More Than Twice The Medicare Rate. Exploring the Problem Space, May 27, 2018

Centers for Medicare & Medicaid Services (CMS) National Health Expenditure Accounts

GAO-18-88 and GAO-18-88 Reports on Medicare and Medicaid Fraud 

IOM Report Focuses On $750 Billion In Inefficient Health Care Spending

Issues 2020: Private Health Insurance Saves Americans Money Chris Pope/Manhattan Institute August 1, 2019

How Employer-Sponsored Insurance Drives Up Health Costs by Avik Roy/Forbes Lyu et al. (2017) Overtreatment in the United States

Medicare And Medicaid Fraud Is Costing Taxpayers Billions. Merrill Matthews/Forbes May 31, 2012.

NHE Fact Sheet 2017  

Vilsa Curto et al., “Healthcare Spending and Utilization in Public and Private Medicare,” NBER Working Paper 23090, January 2017