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High Costs Attributable to Complex Insurance System

A recent study by Chapin White in Health Affairs (2007), which compares U.S. health care spending growth rates with aggregate OECD growth rates, shows that while the U.S. ranked moderately for health care spending among OECD countries in the 1970-1985 time period, health care spending rose so significantly in the period between 1985 and 2002 that its rate of excess growth was significantly higher than the overall rate for the OECD.[1] The author determined that while population ageing, economic growth, and adoption of new health care technology may account for some portions of this growth, these factors are not dissimilar form other OECD countries and thus do not account for the significant difference in growth rates.

The complex U.S. insurance system – which is relatively different from its peers in the international scene – may, however, offer some explanation of the significant rise in health spending.[2] A 2004 study by Reinhardt, Hussey, and Anderson echoes these results; the authors point out that “research suggests that a sizable fraction of higher U.S. health spending, not explainable by higher GDP per capita, can be traced to the higher administrative overhead required by such a complex system.” [3]

Most other OECD countries have systems dominated government-controlled health care programs that allow for greater governmental control of health care spending. The U.S.’s highly privatized system, however, allows for little cost control.[4] In the U.S., market power in the health care system is concentrated mainly in the hands of providers who can increase prices without significantly hampering demand.[5] The result is a system where inefficiencies are rampant and health care decisions rest in the hands of private interests.

Percentage of National Health Expenditure Spent on Health Administration and Insurance (2003)
Source: “Why not the Best? Results from a National Scorecard on U.S. Health System Performance,” The Commonwealth Fund Commission on a High Performance Health System, Sept. 2006: p. 26, 24 July 2007 <http://www.commonwealthfund.org/usr_doc/Commission_whynotthebest_951.pdf?section=4039>.