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Why health care costs more in the U.S.

There’s an old saying that you get what you pay for. If you’re looking to debunk that notion, there’s nowhere better to look than at health care in the United States. In the U.S., we pay almost twice what other wealthy countries pay for health care – on a per capita basis Australia, Canada, France, New Zealand, and the UK all pay less than half of those of us in the U.S.

What we get for that spend is pretty disappointing. Let’s start with life expectancy. In the U.S., it’s by far the shortest compared to any other wealthy country in the world. Ours is 2 1/2 years shorter than New Zealand and the UK, four years shorter than France, and almost five years shorter than Australia.

Among our peer group of wealthy countries, we also have the highest rates of chronic disease, the highest rates of avoidable hospitalizations, the highest rates of avoidable death, and the highest rates of infant mortality. Equally disturbing, is that we are failing to meet our mental health needs – we also have the highest rates of suicide of any wealthy nation.

So, why does the U.S. spend more and get comparatively little in return? There are different reasons, but the biggest problem is that we just overpay. We pay significantly more for health care services and we pay a lot more for prescription drugs. As the second largest purchaser of public employee health care in the country, CalPERS is all too aware of this issue. And we have a strategy and a plan to address it.

A common misperception is that U.S. health care is more expensive because Americans use more health care services. Yet, the data shows that’s not the case. In the U.S., the use of services, called utilization, is fairly flat over time. What hasn’t remained flat are prices.

The price of health care services continues to rise. We see this when we compare prices and utilization to a benchmark of other wealthy nations. Differences in utilization exist, for example, we do more hip and knee replacement surgeries, MRIs, and more cancer screening than benchmark countries. But there are also instances where we use less. We go to the doctor half as often as do Germans, Canadians, and the Dutch, while our hospital utilization is about average compared to others.

One important note is that study after study shows no correlation between the prices we pay for health care and the quality of those services.

The prices we pay are just staggeringly higher. A CT scan costs roughly $140 in Holland and about $1,100 in the U.S. On the drug side, a leading rheumatoid arthritis drug is five times more expensive here than in South Africa, and the same is true of a standard brand hepatitis C drug.

Not only do prices vary across countries, there’s also dramatic variation in price across different geographies within the U.S. as well as within California. Back to the CT scan example with an average U.S. cost of $1,100. The price of the same scan can range from $250 to $1,500 in different states, creating a six-fold variation for a standard procedure that involves the same machine and the same training for the technician who administers the procedure.

Within California we also see a great deal of variation in the price of health care. People living in Northern California, particularly the Bay Area or Sacramento, have significantly higher health care costs than those who live in Southern California.

While high prices are a systemic issue in the U.S. health care system, there are ways to address price and lower costs. One important way is through competition. Prices tend to be lowest in areas of California where there is strong competition among health care providers, and they are highest where there is a lack of competition.

One strategy we’re betting on is that by promoting competition in areas of the state where it’s lacking, we’re going to be able to effectively lower prices, and in turn lower health care costs for our members.

View Healthcare Competition: Background, Current Research, and Strategy Development (PDF) to learn more about our work to improve health care competition in California.

This article was written by Don Moulds, Chief Health Director, CalPERS.