In the United States, healthcare expenses surpass those of any other nation, but we rank the lowest in life expectancy among large, affluent countries.

Several unique characteristics of our healthcare system contribute to this issue. For instance, there’s a greater emphasis on compensating doctors for performing medical procedures rather than promoting overall health, coupled with a lack of transparency regarding costs. Additionally, funds are often allocated towards areas that do not directly enhance patient well-being.

According to Harvard economist David Cutler, “Our spending on administrative costs exceeds what we spend on treating heart disease and cancer combined, which is outrageous.”

The escalating costs of healthcare affect nearly everyone.

Over the past 24 years, the expense of health insurance coverage taken from employee paychecks has surged almost three times faster than wages. Health-related debts are a leading cause of personal bankruptcy, with medical bills making up over half of consumer credit debt in 2022, as reported by the Consumer Financial Protection Bureau.

Public dissatisfaction with soaring costs and inadequate care has recently been aimed at the health insurance sector, particularly following the tragic death of UnitedHealthcare CEO Brian Thompson.

Senator Elizabeth Warren from Massachusetts highlighted that, although violence is never justifiable, the public’s outrage should serve as a critical warning to the healthcare industry. In a recent interview with the Huffington Post, she remarked on the “raw reactions” from individuals who feel “cheated and exploited by the reprehensible practices of their insurers.”

However, health economists emphasize that the entire healthcare system, and not just insurance companies, requires examination to understand the escalating medical costs.

Last year, health insurance firms recorded profits totaling $25 billion, while hospitals amassed a staggering $90 billion, according to economist Vivian Ho from Rice University.

“It’s evident that the public is outraged about healthcare expenses,” Ho stated. “While it’s positive that individuals are expressing their frustration towards insurers, they should also direct similar scrutiny towards hospitals, especially since many operate as nonprofits.”

Below are seven key factors explaining why healthcare costs in the U.S. are significantly higher than in other nations, without yielding improved health outcomes:

Reason 1: Absence of Price Regulation

U.S. hospitals accommodate more specialists compared to healthcare facilities in other countries. The availability of round-the-clock specialty services, especially in major urban hospitals, significantly contributes to rising costs, according to Harvard Medical School health policy professor Michael Chernew.

Patients in the U.S. also enjoy a greater degree of privacy and space. Typical hospital rooms in America have one or two patients, unlike many international facilities that feature open wards with several beds. Chernew adds that variances in local labor markets and regulatory standards further inflate expenses.

In 2022, hospitals accounted for 30% of the total $4.5 trillion expenditure on U.S. healthcare, based on data from the Centers for Medicare & Medicaid Services. Following hospitals, doctors received 20%. Prescription medications made up 9%, while health insurance—both private and government programs like Medicare and Medicaid—represented 7% for administrative costs.

Most hospitals in the U.S. operate as nonprofits and receive tax exemptions at the federal, state, and local levels. These organizations are expected to offer charity care and community benefits to low-income individuals. Federal laws mandate that hospitals must treat and stabilize any patient who arrives at an emergency room, irrespective of their ability to pay.

However, studies indicate many hospitals fail to fulfill their obligations regarding charity care and community benefits.

Research from Johns Hopkins University and Texas Christian University estimated that nearly 3,000 nonprofit hospitals in the U.S. evaded $37.4 billion in taxes in 2021. At the same time, Medicare records revealed these hospitals provided only $15.2 billion in charity care that same year.

Chernew has suggested implementing price caps on healthcare to mitigate escalating costs. Such restrictions could target markets where larger hospitals dominate and can negotiate higher rates with insurance companies that lack alternatives.

Reason 2: Payment for Services Over Outcomes

Healthcare providers receive compensation based on the number of tests and procedures performed, not necessarily on patient improvement.

Insurance companies reimburse hospitals, labs, or doctors according to pre-established in-network rates negotiated between the parties.

Critics argue that this fee-for-service model encourages quantity rather than quality, as providers who conduct more tests or procedures earn higher payments regardless of whether patients experience recovery.

“This is not how we should approach healthcare in our nation,” stated U.S. Representative Vern Buchanan, R-Fla., during a June hearing discussing an alternative payment model known as value-based care.

Following the passage of the Affordable Care Act in 2010, the Centers for Medicare and Medicaid Services initiated small programs aimed at encouraging healthcare providers to prioritize quality over quantity.

Nevertheless, the U.S. healthcare system has been slow to embrace value-based care initiatives. Out of 50 models launched by CMS in the last ten years, only six demonstrated cost savings and just two showed improvements in care quality, based on June testimony from U.S. Representative Lloyd Doggett, D-Texas.

Reason 3: Higher Pay for Specialists

Specialists, such as cardiologists and oncologists, earn substantially more from Medicare and private insurance compared to primary care physicians.

Some view the current healthcare system as one that benefits doctors who handle patients with complicated health issues while offering lower compensation to primary care physicians focused on disease prevention.

Currently, the American Medical Association selects doctors to set recommended payment rates Medicare should provide for specific services. Critics liken this arrangement to a fox watching the henhouse, suggesting a conflict of interest.

The health news site STAT has recently reported that Robert F. Kennedy Jr., who has been nominated by President-elect Donald Trump for Secretary of Health and Human Services, aims to reduce the AMA’s dominance over medical billing codes.

Medicare payment standards not only influence taxpayer costs for healthcare for seniors but also shape pricing across the healthcare sector. Private insurance providers often base their payment rates for doctors and hospitals on Medicare’s fees.

If changes lead to better pay for primary care providers focusing on preventive measures, it could enhance public health and cut down expenses linked to specialist care, Ho noted.

Reason 4: Administrative expenses drive health costs up

According to several experts interviewed by YSL News, one major source of unnecessary healthcare expenses is high administrative costs.

While Medicare’s official healthcare expenditure report does not specify the amount spent on administrative functions, Harvard’s Cutler estimates that administrative costs could account for as much as 25% of overall medical spending.

Health insurers frequently require healthcare providers to obtain approval before carrying out procedures or surgeries. They may also enforce “step therapy,” which compels patients to try lower-priced medications before covering more expensive doctor-recommended options.

These requirements create a surge of communication and tasks for healthcare providers and insurers alike, Cutler mentioned.

Even though medical records are digitized, many electronic health systems often fail to share information with outside entities like insurance companies, leading to extra administrative burdens when physicians seek approvals from insurers for their patients.

More effective communication could streamline processes and decrease red tape if insurance companies were able to electronically access patient records, Cutler suggested.

Instead, many still resort to phone calls and outdated technology like fax machines.

“Fax machines are now primarily used in healthcare,” Cutler remarked.

Cutler remarked that government-operated Medicare functions in a more streamlined manner, allowing doctors who care for Medicare patients to bill and receive payment without the extensive oversight imposed by private insurers.

A downside to this approach is that dishonest providers could exploit the system to submit fraudulent claims to the federal program, Cutler pointed out.

Reason 5: Health care pricing lacks transparency

Patients often find themselves unaware of the costs associated with tests or procedures prior to visiting a clinic or hospital. Healthcare prices are typically obscured, and since insured individuals might still have to cover a portion of their bills, knowing these costs is crucial.

The cost of an MRI can range from $300 to $3,000 based on the facility, and a colonoscopy may vary from $1,000 to $10,000.

Economists highlighted such drastic differences in healthcare pricing while urging Congress to pass the Health Care Price Transparency Act 2.0, which mandates hospitals and providers to reveal their pricing structures.

A law initially passed during Trump’s administration and enacted under Biden requires hospitals to publicly disclose cash prices and negotiated rates with insurers for a wide range of procedures in a format accessible for analysis. Additionally, the rule requires hospitals to provide price estimates for at least 300 services for comparison by consumers.

Nevertheless, a report by the consumer advocacy group Patient Rights Advocate in November indicated that only 21% of hospitals fully adhere to the current federal price transparency regulations, a drop from 35% earlier in the year.

Reason 6: Americans face higher prescription drug prices than those in other wealthy nations

There are no established caps on prescription drug prices, leading Americans to pay significantly more for essential medications compared to residents of other affluent countries.

A 2023 HHS report stated that U.S. prescription drug prices are more than 2.5 times higher than those in 32 similar countries.

A study focusing on 224 cancer drugs approved by the FDA from 2015 to 2020 found that the average annual expense for patients reached $196,000.

Lawmakers have scrutinized the costs of weight-loss medications like Ozempic and Wegovy. During a hearing in September, Senator Bernie Sanders questioned the top executive at Novo Nordisk on why U.S. residents pay substantially more for these drugs than individuals elsewhere. Despite discounts, consumers still pay $969 monthly for Ozempic in the U.S., whereas it costs $155 in Canada, $122 in Denmark, and $59 in Germany, according to a document presented by Sanders.

Reason 7: The Influence of Private Equity

Investors from Wall Street who oversee private equity firms have acquired hospitals and major medical practices, often prioritizing profits above all. This influence has come under increasing scrutiny from regulators and politicians.

An illustrative case is the high-profile bankruptcy of Steward Health Care, established in 2010 when a private equity firm took over a struggling nonprofit hospital system previously owned by the Archdiocese of Boston. The organization is headed by a former heart surgeon who earned over $100 million in compensation and purchased a $40 million yacht, all while staff at Steward hospitals reported shortages of essential supplies, as highlighted by a Senate committee. This led to layoffs and hospital closures.

Private equity groups have also targeted specialty practices in specific states and metropolitan areas.

Last year, the Federal Trade Commission filed a lawsuit against U.S. Anesthesia Partners for its ongoing acquisition of practices in Texas, claiming such transactions violated antitrust laws and increased costs for patients. The federal agency also took action against private equity investor Welsh Carson, who funded these acquisitions, known as “rollups,” but a federal judge in Texas dismissed Welsh Carson from the lawsuit.

The FTC Chair Lina Khan has stated that the quick acquisitions enabled doctors and private equity firms to hike anesthesia service prices, resulting in “tens of millions of extra dollars for these executives at the cost of Texas patients and businesses.”

A study from the National Bureau of Economic Research, conducted by scholars from Yale, Northwestern, and the University of Chicago, identified 18 metropolitan areas where these series of anesthesiology acquisitions, termed “rollups,” led to fewer choices for providers and increased costs for consumers.

The unfortunate murder of an insurance executive has drawn attention to the unique elements of the American healthcare system.

Andrew Witty, the CEO of UnitedHealth Group, which includes UnitedHealthcare, called the murder of Thompson “unconscionable” in an op-ed on Friday. He also recognized the shortcomings that countless Americans experience in their healthcare.

“We acknowledge that the healthcare system does not operate as effectively as it should, and we relate to the public’s frustrations with it,” he stated.