Why Does America Spend So Much on Health Care?

A man looks at his health care options
A man looks at his health care options. | Joe Raedle/Getty Images

As Americans, we certainly seem to get hosed when it comes to health care costs. Although leaders often praise our system as the world’s best, it’s not uncommon to see our friends and family members go into bankruptcy due to health issues. Meanwhile, just about every other country in the world has some sort of single-payer model, shielding people from these sorts of costs.
Why do we pay so much? Are we getting better outcomes? And where is all of that money going?
The first question is extremely difficult to answer. The simplest way to do so, though, is to point to the fact that our private-public system is extremely complicated. There are insurance companies, health care providers, drug manufacturers, etc. And they all need to pay their employees, research new products, and keep the lights on.
As for the second question? The answer is a resounding “no.” The fact is we spend more money on health care, and we have worse outcomes. That’s the toughest pill to swallow when it comes to discussing American health care. And the people running the show in Washington can’t seem to fix it.
But how about that third question? Where is all of that money going? Again, it’s a complicated question. It’s better to ask why we’re spending so much more than other countries. Using a report from McKinsey & Company that dives deep into the details, we can start to put the pieces together. On the following pages, we’ll look at several of the key areas in which U.S. spending is higher than other Organization for Economic Cooperation and Development countries.
Something to keep in mind is the McKinsey study is a bit dated, having been published in 2008. At that time, the Affordable Care Act had yet to come into play, and the Great Recession hadn’t blown a crater in the finances of millions of Americans. So there are some discrepancies in the specifics. But the report does give us a general idea of where the big spending differences lie, which is what’s important.
Let’s take a quick look at how Americans are spending more on health care than other countries.

Outpatient care

Health care workers care for a patient in the ER
Health care workers care for a patient in the ER. | David McNew/Getty Images

According to the McKinsey report, outpatient care is one of the key areas in which the U.S. vastly outspends other OECD countries. Outpatient care (also called ambulatory care) is a broad category, but generally, it refers to any kind of medical treatment that doesn’t require an overnight hospital stay. These treatments, evidently, are growing wildly in terms of cost, and they are one of the primary reasons insurance premiums are increasing.

Inpatient care

A nurse adjusts an IV drip machine
A nurse adjusts an IV drip machine. | Justin Sullivan/Getty Images

The inverse of outpatient care, naturally, is inpatient care. This refers to treatments that require a hospital stay overnight and can include a host of procedures. U.S. spending on inpatient care isn’t nearly as out of sync with other OECD countries as our outpatient care, with McKinsey’s report putting it slightly above average. Still, the way Americans pay for these treatments (private insurance and out-of-pocket versus single-payer systems) is the primary concern for most patients.

Pharmaceuticals and drugs

Martin Shkreli, former CEO of Turing Pharmaceuticals LLC., smiles
Martin Shkreli, former CEO of Turing Pharmaceuticals LLC. | Mark Wilson/Getty Images

This should be the least surprising element to the health care costs equation. We know drug prices are out of control — so much so that many people can’t afford to buy them on their own. Turing Pharmaceuticals, the makers of EpiPen, and others have become the focus of public ire for this very reason. There are complicated reasons why drugs and pharmaceutical spending is relatively high in the U.S. And it doesn’t look like that will change anytime soon.

Administrative costs and insurance

Medical bill and health insurance
Medical bill and health insurance | iStock.com/everydayplus

-Another reason health care costs are so high in America is due to bureaucracy — both public- and private-sector bureaucracy. The boogymen at the center of our health care cost crisis are the insurance companies. Acting as middlemen, insurance companies inflate prices to the point where people can’t afford drugs or treatment without them. Like with pharmaceutical pricing, this, too, is complicated. But the added costs of administration and insurance in the system don’t help bring us closer to price equilibrium.

Preventative public health measures

A no-smoking sign
A no-smoking sign | Pascal Le Segretain/Getty Images

McKinsey’s report identifies “preventative and public health” as another category in which the U.S. outspends other countries. Unfortunately, it’s with mixed results. As the report says, these costs are inflated “largely as a result of state-level initiatives associated with disease control, data collection, community health services, and tobacco-cessation programs.” The report also says these programs, in the long-run, help keep health care costs in check, so it’s generally a good idea to “promote and enhance them.”

Research and development

A scientist examining cells in a 96-well plate
A scientist examines cells in a 96-well plate. | Dan Kitwood/Getty Images/Cancer Research UK

We develop a lot of drugs and treatments in America, and those costs ultimately become baked into our health care costs. The McKinsey report notes a good portion of that spending goes toward funding the National Institutes of Health. And it says the investments in future treatments aren’t divvied up evenly. Often, we spend more researching less-common diseases than other, more prevalent maladies, such as heart disease and obesity.


An emergency room nurse walks through a hospital unit
An ER nurse walks through a hospital unit. | Darren McCollester/Getty Images

On average, the U.S. spends slightly more on health care facilities than other countries. These facilities are expensive, and there are a lot of rules and regulations concerning how and where they’re built. One unique feature ingrained into the U.S. system is private investment makes up the lion’s share (80%) of overall spending on facilities, the costs of which are then passed on to consumers and patients.

American doctors

Man visits the doctor.
Man visits the doctor. | iStock.com

As unsurprising as it might be if you’ve ever looked at a hospital bill, American doctors tend to charge more. This is yet another area that has a lot of complicated root causes. But when you compare average earnings of general practitioners and specialists in the medical field in the U.S. to other countries, we rank very high on the list. Remember, though, people spend many years and hundreds of thousands of dollars to become doctors. And they have to recoup their investment — even if the bottom-line pricing isn’t entirely up to them.

End-of-life care

A terminally ill hospice resident visits with a therapist
A terminally ill hospice resident visits with a therapist. | John Moore/Getty Images

The final area we’ll look at is end-of-life care. Caring for our sick and dying, particularly older people, is very costly. In fact, the costs associated with end-of-life care end up consuming a good percentage of our overall health care spending. While this particular area eats up a lot of resources, there is still some debate as to just how much we spend compared to other countries, as well as how big of a contributor end-of-life care is to the spending gap.