Why Is U.S. Healthcare So Expensive, and What Can We Do About It?

Eren Bali
August 5, 2021
10 mins

In 2015, I started thinking about healthcare as an outsider to the industry. Why is it so expensive? And is it inherently expensive, meaning the problem can’t be solved? Or is the problem structural — one  that might be solved with technology and innovation?

I came to the conclusion that the problem is structural, and there is something we can do about it. Healthcare experts, the government, employers, and consumers all have roles to play in making healthcare more affordable. 

Here’s the story and a set of propositions.

Why U.S. Healthcare Is So Expensive

At a high level, U.S. healthcare is expensive because it comprises many components, each of which is expensive by itself — and each defends its prices by pointing fingers at the other components. Hospitals defend the high price of healthcare delivery by saying that “malpractice is very expensive,” “uninsured patients cost a lot of money,” and so on. But those things are expensive because healthcare delivery is expensive in the first place.

That said, this is not a simple chicken-and-egg conundrum. The problem stems from a scheme that is nearly universal among healthcare providers: building a regional monopoly (or oligopoly) for some critical healthcare services, and then using that as leverage to dictate outrageously high reimbursement rates from insurance companies for a wider range of healthcare services. 

For example, if a health system controls the majority of the orthopedic surgery capabilities in a region, all insurance companies will be forced to accept whatever contract they push, not only for orthopedic surgery but also across all services, and not only in that region but also in the entire state. 

As a result of this monopolistic practice, the cost of any given service can be much higher than what other providers are able to charge. This situation has incentivized a lot of healthcare providers to consolidate, not to provide better care but, rather, to increase their bargaining power. If one provider can charge high prices, then prices typically increase throughout the surrounding area. To dig deeper into one of hundreds of examples, you can read more about the Sutter Health antitrust lawsuit.

Does this mean these companies are extremely profitable? At one point, they were. But over time they lost their margins because of poor management. High-margin services tend to create inefficiencies in operations: poorly utilized physical space, high-paid executive staff, and general mismanagement. If you don’t need to be efficient, eventually, you won’t be. 

One of the main reasons these margins evaporate is that these regional monopolies start investing in lower-margin services just to refer patients to their high-cost services. Often, the patients don’t notice this because they have premium insurance, or they don’t notice the difference in the cost, or they simply don’t understand the details of confusing medical bills. Eventually, these providers go all the way to primary care services. At that point, thanks to their highly inefficient operations, they manage to lose money despite their ridiculously high prices (I’ve heard some hospital executives say it’s about $150,000 per primary care physician). But they can justify it — they need only a handful of spine surgeries to pay for that “lead gen” cost.

Source: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical

In addition to the regional monopolies, there are structures like clinically integrated networks (CINs), which allow hospitals (with strong insurance contracts) to claim they lack certain clinical capabilities, and bundle other providers under their contracts. In practice, they’re trading higher reimbursement rates for referrals from those providers. These structures obviously create more “pricing power” for the CINs, increase overall costs in the system, and make healthcare less accessible for many consumers. 

This is especially problematic because there’s been a rise in high-deductible insurance plans (roughly 50 percent of plans), and those higher reimbursement rates are coming directly from patients. And 15 percent of Medicare-ineligible adults are completely uninsured. If you’re in this group of uninsured or underinsured people, you may have learned about the high cost of care the hard way: being driven into debt or bankruptcy by medical bills. Medical expenses are the reason behind most bankruptcies — 65 percent by one estimate.

In most discussions about healthcare accessibility and expense, the conclusion goes something like this: “All these problems will be solved when we transition from fee-for-service (paying doctors for services) to value-based care (paying doctors a variable rate for ‘outcomes’).” I do believe there are great advantages to value-based care models: they create flexibility for providers to keep patients healthy without providing costly care: for instance, by providing healthy meals, helping patients exercise, or doing things to increase care adherence. But value-based care is not the silver bullet that will fix healthcare accessibility problems. While changing incentive structures sounds smart, providers have found ways to game the system. The main way is by upcoding risk factors — because Medicare pays a variable annual rate based on patients’ risk factors. There’s been a boom in using unnecessary diagnostics, like full-body MRIs, to find as many “risk factors” as possible. All of a sudden, patients on average look a lot sicker. Value-based care models create an advantage for large, usually private-equity-backed providers that can invest in rigorous documentation. The definition of “value” is slippery.

Sources: Roosa Tikkanen and Melinda K. Abrams, U.S. Health Care from a Global Perspective, 2019: Higher Spending, Worse Outcomes? (Commonwealth Fund, Jan.2020). Organisation for Economic Co-operation and Development https://twitter.com/erenbali/status/1365354814473834496?s=20

At the end of the day, value-based care would be the most critical solution if Americans were over-utilizing healthcare. But in reality, they aren’t. People aren’t going to the doctor too much in this country; they’re just being charged too much for the care they receive.

Healthcare providers have become very practiced at finding dozens of reasons for charging a lot (malpractice insurance, the cost of “charity care,” regulations, and so on). But most of them are overblown excuses, made possible by the lack of transparency in the industry.

I could take a crack at the role of the AMA (American Medical Association) in all this, but I’m not that brave.

Most people assume that private insurance companies would fight against all this, but in reality, they have regulated margins (10 to 15 percent based on the risk category). They’re fine with the fact that the total cost is high, as long as all the other insurance companies are subjected to the same cost. If an average person’s healthcare cost goes from $12,000 to $6,000 a year, they lose half of their revenue and profit. 

Since legacy healthcare providers and insurers are complicit in this, the solution has to come from the other parties involved: the government, employers, consumers, and (self-promotion alert!) disruptive healthcare providers. 

What We Can Do About It

No single person or organization will be able to fix all the healthcare problems in this country. We need people who are paying for healthcare, consuming healthcare, and providing healthcare each to do their part. 

The U.S. government (through Medicare and Medicaid) is the biggest payor in healthcare, covering roughly 40 percent of total healthcare costs. Medicare does certain things right, like paying standardized fair rates to all providers, and also inventing innovative value-based care models. Those models aren’t perfect, as I explained earlier, but Medicare actively iterates on them, and most private insurance companies follow their lead. Insurance may be the only industry where the government is more innovative than private companies. I believe it would be advantageous to strengthen Medicare further.

However, while Medicare is a lever, it represents only 16 percent of the population. Medicaid is expanding, but it has its own problems and is very limited in coverage. In this country, 150 million people are commercially insured, generally by their employers.

Employers as a group pay 42 percent of the total cost. They’re the target victims of the regional monopolies’ jacked-up prices, which have been rising four percent every year on average, in addition to increased deductibles from employees. The larger employers, representing one-third of all employees, are usually self-insured. (This means a private insurance company acts as an administrator, but the employer is paying the bill in the end.) These employers have a huge incentive to reduce costs, and the only reason they haven’t is that the billing and reimbursement models are intentionally obfuscated by insurance companies and large health systems. The scam is that insurance companies force healthcare providers to send claims for two to ten times what they’re contracted to receive. This is literally in the contract. Then the insurance company acts like they’ve found massive discounts for the employer.

As employers, we have a moral obligation to get smarter about healthcare costs. Yes, there’s a lot on your plate for your core business, and these things are really complicated (by design). However, employers should understand that this is no longer a problem that they can ignore. If healthcare costs as a percentage of GDP continue to go up like this, it will become a threat to the U.S. economy as a whole, as well as to our own balance sheets and our employees’ well-being. We have the responsibility to demand high-quality care for our people at the lowest cost.

Even if you’re a wealthy employer for whom the cost of benefit plans doesn’t matter too much (wink, wink, Big Tech), by feeding the bloated healthcare providers and shielding your employees from the real cost, you’re supporting a situation in which fewer people have access to healthcare.

The first step is hiring experts who deeply understand healthcare costs and know how to manage them. This will benefit you whether you have four million employees or 40. You may not know this, but the only thing insurance companies are scared of is losing you — don’t let them get away with lip service.

Affluent consumers typically have premium insurance plans, and if you’re one of them, you may not notice the cost of your care. But your healthcare choices may be enabling the problem. Every time you allow one of those inflated claims to be processed on your behalf, you are supporting the status quo and removing the incentive to change the price or cost. Not all providers overcharge. There are awesome providers who don’t, and you can choose to be their customer. Price is not a good indicator of quality of care; it usually means a marginally more luxurious physical space but doesn’t usually translate into better customer experience. An identical MRI may cost 10 times more in a hospital than in an outpatient center. If you refuse to use healthcare services that have an unreasonable total cost (not just your co-pay), the providers will be under pressure to create transparency about their prices and ultimately lower them. 

This type of consumer activism has worked to reduce environmental harm and unfair work environments. You wouldn’t buy a good-looking purse if you knew it had been manufactured at the cost of unfair labor conditions or a high carbon footprint. If we treat healthcare similarly, there’s no reason it can’t work there too. 

We experts have a responsibility to make it easier for consumers to understand healthcare costs and make informed decisions. We should write articles, make illustrations, and make videos — and if we’re the ones designing the system, we should make it simpler. Complexity hides the underlying problems.

Lastly, if you’re a healthcare provider, be your own market force. Keep a lean operation. Continuously negotiating higher reimbursement rates may be tempting, especially because it feels like you’re getting that money from insurance companies, and there are always other providers charging more. But unless some of us show patients that they can receive dignified care at a reasonable rate, the market is never going to change. And even if the patients don’t know how to “shop for healthcare,” they will appreciate not having surprise bills. It creates the type of loyalty and word-of-mouth growth that’s hard to gain otherwise. 

Whether you’re a payor, an employer, a provider, an expert in the field, or simply a consumer, we have to start with understanding the urgency of this problem, and understanding the fact that it’s getting worse every day. The process of fixing this bloated system may not feel that good. We will have to stomach local hospitals shutting down as providers are forced to become more efficient. Jobs and job descriptions will change, which will inadvertently hurt some people, including working-class people. Your favorite doctor may be against some of the changes that need to happen. But we’re in an unsustainable situation — healthcare costs can’t keep rising like this forever. This problem needs definitive action and attention.

More on all this later.

Eren Bali

Eren Bali is the co-founder and CEO of Carbon Health. Eren leads the Carbon Health team toward his vision of democratizing healthcare and making high-quality care accessible to everyone.