Anatomy of the World’s Most Expensive Healthcare System

Many leading healthcare experts believe that fee for service is the root cause of our extremely expensive healthcare system.  While there is an element of truth to this position, it is only part of the story.  Meanwhile, multiple fundamental design flaws that drive healthcare costs upward are not being given the credit they deserve.

Top 5 reasons that Healthcare costs are so high:

1.  Insured patients have not been concerned about the costs of healthcare.  Until recently, a third party payer has covered most healthcare costs and the percent paid by healthcare consumers has been steadily falling from 50% in 1960 to 12% in 2010 (1).   Without skin in the game, the healthcare consumer has had no incentive to reduce costs and the provider has had no constraint from offering high cost care.  The landscape is changing with the cost-sharing insurance strategies that are placing more financial responsibility with the consumer. High-deductible and co-insurance policies are forcing healthcare consumers to learn about cost and value.

2.  Patients and providers are unaware of the costs of care.  Unconcerned about the costs of care, consumers have engaged in healthcare without any knowledge of the costs. Consumers get an MRI of the brain for $3900 when they could have one for $425, or an endoscopy for $7700 when they could have had one for $500.  Neither consumers nor providers have had access to the information about cost (2).  Several organizations around the country have been striving to introduce cost transparency but, thus far, patients have been slow to access the data.  Leaders in this space include Castlight, Healthsparq, Robert Wood Johnson Foundation, Healthcare Blue Book, Clear Health Costs, Costs of Care, Catalyst for Payment Reform (CPR), Health Care Incentives Improvement Institute (HCI3). Health Care Cost Institute (HCCI), Change Healthcare, and FAIR Health.  Cost data without meaningful and reliable quality measures will be very difficult for consumers to interpret.

3.  Private insurance companies have been able to increase premiums annually and , therefore, have had little incentive to hold down the costs of care. This trend has reached its limit as businesses have been shifting more of the costs of insurance coverage to employees.  For many low and middle class families, costs have hit a breaking point with deductibles in the range of $4000-$8000 per year.  Consumers can no longer ignore costs when choosing their healthcare providers.   AHIP (America’s Health Insurance Plans) recognizes that it is time to lower healthcare costs and is supporting the idea of fee transparency.(3)

4.  Providers have incentive to spend more – resulting in more income and more protection from malpractice claims.  Elimination of the fee for service system is the most widely touted solution for controlling healthcare costs.  The proposed solution is designed to remove the provider’s incentive for more healthcare spending either by making all physicians employees, or by creating a financial incentive to spend less (ACO, bundled care).  However, salaried physicians working for large institutions that retain their profit motive, and may still be pushed to think of profits first.(4,5).  Physicians are now gravitating to salaried positions in large institutions where the contracted fees from private insurance carriers are substantially higher (6).   It is unlikely that any cost savings from this model will balance the cost increases that accrue from consolidation….particularly since ACOs, to date, have only managed to save about 1% of costs. (7)

5.  We do not have enough primary care providers.   The US has the highest ratio of specialists to primary care providers in the world – driven largely by the lack of medical student interest in primary care.  The lower earning potential of primary care in the face of very high college and medical school debt, leads most new physicians to choose specialty care.  More specialists leads to higher costs of healthcare.(8)   Reforming the relative value payment scale to recognize the benefits of primary care would help to alleviate this imbalance.

Making consumers aware and concerned about healthcare costs will drive them to seek high value providers.  Combine this with incentives for providers  to be more efficient with healthcare resources, and the mechanisms for real cost reduction will be in place.  Failure to address all of the flaws in our current system will limit the success of healthcare reform.



1.  Baicker, Katherine, and Dana Goldman. 2011. “Patient Cost-Sharing and Healthcare Spending Growth.”  Journal of Economic Perspectives, 25(2): 47-68.

2.  Michelson, Dan,  “Doctors don’t know or care about cost?  That’s half right.”  Healthcare IT News, 2/20/14

3.  AHIP web site: “Rising healthcare costs”

4.  “Hospital Chain Said to Scheme to Inflate Bills”, Julie Creswell and Reed Abelson, The New York Times, Jan 23, 2014.

5.  “A Hospital War Reflects a Bind for Doctors in the US”, Julie Creswell and Reed Abelson, The New York Times, Nov 30, 2012.

6.  “Apprehensive, Many Doctors Shift to Jobs With Salaries”,  Elisabeth Rosenthal, The New York Times, Feb 13, 2014.

7. “ACOs Saving Some Money, But Medicare is Short on Details”, Jenny Gold, Kaiser Health News, Jan 31, 2014.

8.  “What’s The First Step in Transforming American Health Care”  Robert Pearl, Forbes, Feb 20, 2014.