Why Is Healthcare So Expensive in the US?

Why Are Prescription Drugs So Expensive?

Many factors make US healthcare costs much higher compared to other countries, but one of the major reasons is the rising cost of prescription drugs. According to the Congressional Budget Office, US prescription drug spending increased from $30 billion in 1980 to $335 billion in 2018, and the trend of more expensive prescription drugs has continued in 2022 as prices continue to rise. The price of more than 450 prescription drugs jumped 5% in early 2022.

On average, Americans pay approximately twice as much for prescription drugs as residents of other industrialized countries. In Europe, drug prices are government-regulated, with rates often based on the benefit patients receive from the medication.

What factors have caused this vast price difference in prescription drug costs? Five significant factors are:

1. No price regulation. Drug companies are able to charge as much as they want for their prescriptions. The US Food and Drug Administration is set up to regulate new drugs and how they are tested and released to the market, but there is no government oversight on the prices "Big Pharma" charges for the vital medications you need.

2. Supply chain price increases. Pharmacy benefit managers are responsible for managing price negotiations with pharmacies, insurance companies, drug companies, and employers to create a list of approved drugs that will be covered under your plan and how much will be charged for them.

3. Drug exclusivity protection. When a new drug is launched, it receives patent and drug exclusivity protection. Currently, patents last 20 years from the application date. Drug exclusivity means other drug companies aren't allowed to develop drugs with similar effects. While in theory, these concepts inspire research and protect that research, in reality, payers are often left paying for expensive medications.

4. Higher administrative costs. The complexity of the US healthcare system and its multiple providers and variety of payers creates many layers of administration and steps everyone must take to navigate the system, creating much higher administrative costs.

5. Limited competition. In places like Europe and Canada, there are far fewer insurance companies than in the United States. This gives them more leverage, causing drug companies to have to compete in a free market, pushing prescription drug prices lower.

Other Factors Contributing to the High Cost of US Healthcare

Besides the cost of expensive medications, there are several other factors that push healthcare costs higher in the US compared to other developed countries.

1. Waste Caused By Administering Multiple Systems

According to a report from the Journal of the American Medical Association, about 8% of healthcare spending goes toward administrative costs in the US, as compared to 1% to 3% in 10 other high-income countries. What causes this disparity? The American healthcare system is very complex, with different rules and guidelines for different types of insurance. Whether you have employer-based insurance, private insurance, Medicaid or Medicare, there are ranges of coverage and deductibles to choose from. All these options create higher administrative costs.

2. American Doctors and Nurses Make More

In America as of 2020, the average family doctor earns $214,370 a year and specialists make $316,000—far exceeding the average of their counterparts in other industrialized countries. American nurses also make considerably more than other nurses, too. As of 2020, the average salary for a nurse in the US is about $74,250. That compares to average salaries of $58,041 in Switzerland and $60,253 in the Netherlands.

3. Prices Vary Greatly in the US

Because there is no regulation on the prices for medical services, providers are free to charge whatever price they want. In addition, the amount paid for the same service can vary widely depending on geographical area and insurance coverage.

4. Threat of Lawsuits Drives Costly "Just in Case" Tests

Because both hospitals and doctors want to avoid lawsuits, oftentimes tests and scans may be ordered just to rule out every possible issue. These tests can be quite costly, especially compared to other countries. A CT scan costs on average $896 in the US, but just $97 in Canada and $500 in Australia.