Why is healthcare so expensive?

Josh asked the question. Due to length, I've promoted it to a full post.

Lotsa reasons.

First of all, understand that we spend 50-100% more, per capita, than comparable countries in the OECD, with no better outcomes to show for it. We do not, in the mass, have the best health care in the world, and we certainly have the least cost-effective health care in the world.

My thoughts as to why:

1. Fragmentation
2. Wages
3. Primary Care Physician shortage
4. An over-reliance on technology
5. Perverse incentives
6. Drugs
7. Private Insurance companies
8. Malpractice/defensive medicine
9. Consumer demand
10. Regulation
    
11. The Uninsured
    

More details after the jump.

1. Fragmentation: We don't acutally have a health care system. There is a patchwork assembly of payers, guarantors, patients, and providers, often working at cross purposes and with differing incentives. Preventative care is often not funded or emphasized, communication between parties is poor, patients do not see the real costs, employers who are responsible have little control over expenses.
   
2. Wages: Particularly for non-physician ancillary staff, like nurses, physical therapists, etc, who constitute the largest payroll bloc in health care, salaries here are higher than in the rest of the world. Physicians in the US are also paid somewhat more than elsewhere. In part this is due to the high standard of living in the US, though I do not know if that accounts for all the difference.
   
3. Primary Care Physician shortage: There are fewer physicians per capita in the US than in the rest of the world, and far too few of them are generalists. Specialists are paid more, and utilization of specialists is correlated with higher intervention rates, higher diagnostic test rates, higher hospitalization rates, and higher in-hospital death rates, with no overall improvement in outcomes. If we could take half the specialists out there and make them PCPs, it would probably cut costs and possibly improve health care.
   
4. An over-reliance on technology: See above. We do more CT scans, MRIs, blood tests, etc etc etc. American medicine is much more aggressive than elsewhere. It's fiercely debated to what degree this cultural difference improves the quality of care. A lot of tests have turned out not to be beneficial in the long run. Certainly I like being able to find out answers quickly.
   
5. Perverse incentives: Fee for service compensation drives "doing more" for/to patients. See more patients in the office, get paid more. Admit more patients to your surgical center, get paid more. Costs and reimbursements are often not aligned. Hospitals make money on CT scans and lose money on obstetrics -- guess which services get expanded and used more?
   
6. Drugs: There are no price controls on drugs in the US; there are in every single other industrialized country. This is a double-edged sword. Drug development is very risky, so there needs to be a risk-reward motive to incentivize new drugs. But we are funding the pharmaceutical R&D for the rest of the world. And, it must be added, drug companies are finding it more profitable to repackage and remarket existing drugs than to develop novel medicines, or meds for small-market diseases.
   
7. Private Insurance companies: The profits and inefficienies inherent in the private insurance industry, some estimate to contribute 10-25% of the total cost of healthcare in the US. It's not *just* the $800 million pay that UnitedHealth CEO got paid, it's the 11% of my bottom line that I have to pay to get insurers to pay me, and the staffers that clinics must retain to deal with insurance companies, and the armies of claims analysts that insurance companies retain to deny any claim they can, and the costs that they all incur to advertise, and the lawyers to negotiate contracts with the doctors, etc etc etc.
   
8. Malpractice/defensive medicine: This is hotly debated how big it is. I can't tell you for sure. The med mal insurance costs are not cheap, I do know that. I am comfortable saying that in the ER the cost of defensive medicine is large. Over the full cost of the system, though, I do not think it is huge.
   
9. Consumer demand: Patients do not want to wait, either in the ER or for their elective surgery. Patients equate tests with quality. Patients sometimes want to pursue futile care, or unproven treatments.
   
10. Regulation: There are lots and lots of regulations in health care, including hospital regulations up the yin-yang, and extensive financial regulations to comply with from the federal government. Some of this is good, of course, but a lot of them are redundant, and a large industry has been generated to help organizations stay in compliance. Many of these organizations that generate regulations are self-perpetuating, and much of the regulation is excessive.
    
11. The Uninsured: The uninsured wind up costing more to care for, as they go without needed care and windup sicker and in the ER. The under-insured (like Medicaid patients) get care at below cost, requiring doctors and hospitals perform a cost-shifting game to stay profitable. (And bear in mind that healthcare is a low-margin industry. The average hospital runs a profit margin from 1-4% of total revenue; there's not a lot of room at the top.)
    

I've got to go to work and generate more health care costs, so I'll stop here. This is just off the top of my head, and I am not making any policy recommendations here. But I hope it gives you at least a partial answer to your question.