Why is US Healthcare So Expensive?
In this piece, starting from the point of view of someone who knows nothing about the subject, we will understand the fundamental reason why healthcare is so expensive in the United States. I've always wanted to understand this properly, but I've never been clear on exactly why it is this way.
For context, treatment for appendicitis costs between $25,000 and $60,000, compared with $3,000–$8,000 in Mexico; cataract surgery costs $5,000, compared with $1,000 in Mexico; and intensive care costs about $10,000 a day, compared with $1,000 in Mexico.
The first answer people give is that prices are high because of a lack of regulation. But if there really were little regulation, competition should bring prices down. There is a strong incentive to build hospitals with costs more or less similar to those elsewhere in the world and charge much higher prices without losing customers. If prices remain high, something must be preventing this process.
The first point concerns competition. In an emergency, such as a heart attack, you don't have time to compare hospital prices, and that removes competitive pressure. However, insurers can negotiate fixed prices for each procedure, taking that burden off patients. Insurers have an incentive to negotiate low prices so they can offer more competitive premiums. Some people say insurers earn a percentage of procedure costs and therefore have an incentive to keep costs high. But if I set up an insurer tomorrow that secured low hospital prices, I could take their customers and put traditional insurers out of business. The incentive to compete is there, so I don't think this argument about competition is a relevant explanation.
To organize the analysis, let's imagine setting up a hospital with normal prices. We'll have plenty of customers and make plenty of money. SOMETHING is going to stop us.
It turns out that when we try to open the hospital and negotiate with insurers, they won't want to work with us, because established hospitals are threatening them: “If you include this cheap hospital in your network, we'll leave.” The insurer would lose the vast majority of hospitals and could no longer guarantee customers access to the main hospitals, which they need in emergencies.
First, this shouldn't be legal. At least in this sector. If dumping, collusion to fix prices, unfair competition, and market manipulation are illegal, this should be illegal too. In general, I don't like adding restrictions and regulations, but in a sector that is already so regulated, I don't object to this one. It protects competition.
The problem is that it's very difficult to prove this is happening, rather than contracts ending for some other reason. Creating our own insurer doesn't solve it either: most hospitals still won't want to work with us.
One solution would be price controls, as in most European countries. The Netherlands, for example, has a good system. But I think a competitive market could reduce prices even further, with better quality. The profit motive encourages innovation and efficiency much more than private nonprofit or cooperative hospital systems do. It allows a few people to risk large amounts of capital to create something new and better, which doesn't happen easily in cooperative systems.
Let's consider simpler problems first, such as cataracts. They aren't emergencies, so we can choose cheaper hospitals or clinics, yet they still cost five times as much as in Mexico. What stops me from opening a specialist cataract clinic? I've been investigating this, and malpractice insurance costs between $30,000 and $80,000 a year because the American legal system often imposes very large financial penalties (punitive damages), whereas European systems tend to award more reasonable compensation. Even so, why can't we agree in advance, by contract, that if negligence occurs, compensation will be set at these amounts and the case will be heard by this arbitrator rather than a regular court?
It turns out that liability waivers are illegal in healthcare. If such a contract were signed, a judge would invalidate it.
This is the second fundamental problem. If the terms are agreed by contract, the contract is easy to understand, and the limits are reasonable, there shouldn't be a problem. The rest of the world does it this way without trouble.
The third regulatory problem that needs changing in many states is the Certificate of Need (CON). To open an outpatient surgery center, where people have operations without staying overnight, the state must issue a certificate of need. It asks existing hospitals whether your center is “needed,” and if the hospitals deny that need, you are denied permission.
Even if the center isn't needed, it should be allowed to open as long as it meets quality standards. It isn't the state's place to judge whether it is necessary. It's fine for the state to create centers when it sees a need, but not to do the reverse. There is no reason for the state to prevent an outpatient surgery center from opening because it considers it unnecessary. That is unfair competition.
Another problem is Medicare. Medicare is the government health insurance program for people over 65, covering more than 65 million people. As such a large payer, it should have enormous negotiating power with hospitals, similar to European governments. However, federal law, introduced through pharmaceutical and hospital industry lobbying, prohibits Medicare from negotiating prices aggressively in many cases. For example, until 2022, Medicare was legally prohibited from negotiating drug prices. This is absurd: you have the country's largest buyer and prevent it from using its negotiating power. It's as if Amazon couldn't ask for volume discounts. This legal restriction is another artificial barrier keeping prices high.
One possible way to compete with established hospitals, without first banning their current contractual threats, would be to specialize in nonurgent, low-risk procedures, gradually add more complex and higher-risk procedures, and reach a point where most of these hospitals or centers could easily adapt to handle emergencies. The pressure would then be too strong, and insurers would negotiate with these new hospitals, breaking the current oligopoly.
Another reason costs are so high is labor. Labor costs are two to four times higher than in Europe. A nurse in Spain earns about €25,000 a year; in the United States, $75,000–$90,000. A doctor in Europe earns 70,000–150,000; in the United States, $200,000–$600,000. Since wages account for 50–60% of a hospital's costs, this multiplies total costs by two to three.
The obvious question is: why isn't there more immigration? If a Filipino or Spanish nurse can earn three times as much by coming to the United States, there should be a flood of healthcare workers moving there, increasing supply and bringing wages down to reasonable levels.
It turns out that immigration barriers are extremely restrictive. H-1B visas for skilled workers are capped at about 85,000 a year across ALL industries (technology, healthcare, finance, and so on) and allocated by lottery. Each state also has its own medical and nursing licensing requirements, which are very difficult for foreign professionals to meet. You have to pass specific exams, such as the National Council Licensure Examination (NCLEX) for nursing and the United States Medical Licensing Examination (USMLE) for medicine, pay thousands of dollars in fees, and validate your credentials, a process that can take one to two years.
Most importantly, medical and nursing professional associations actively lobby to maintain these restrictions. They argue that it's about “quality control,” but the reality is pure protectionism. Many countries have excellent medical training systems (Germany, the United Kingdom, Canada, Australia, and the Philippines), yet their professionals cannot easily work in the United States. The result is an artificial shortage of workers that keeps wages extremely high, and hospital prices high with them.
Things that are NOT the problem
It's worth distinguishing things that look like problems but don't actually prevent competition.
1. The Emergency Medical Treatment and Labor Act (EMTALA), requiring emergency treatment without guaranteed payment: Federal law requires hospitals with emergency departments to treat patients whether they can pay or not. This sounds like a problem, but it isn't. If you don't want to handle emergencies, don't build an emergency department: you can open an outpatient surgery center for elective procedures. If you do decide to have an emergency department, even if you absorb 10–15% of cases without payment, you can still be very profitable if your costs are 40% below your competitors'. Insurers pay normal rates, and low costs give you large margins even after absorbing unpaid cases.
2. “Emergency patients can't compare prices”: It's true that someone having a heart attack cannot go from hospital to hospital comparing prices. But insurers can negotiate fixed prices for each procedure in advance. The patient doesn't need to compare prices during the emergency because their insurer has already negotiated the rates. This isn't a fundamental barrier.
3. “Building a hospital is very expensive”: Yes, opening a full hospital costs $100 million–$500 million. But this is true everywhere. If building a hospital in Mexico costs the same and it charges five to ten times less, while US prices are extremely high, the return on investment should be BETTER in the United States. Construction costs don't explain the lack of competition.
4. Medical Loss Ratio (MLR) regulation, under which insurers earn more when costs are high: Federal law requires insurers to spend 80–85% of premiums on medical care, leaving 15–20% for administration and profit. This creates a perverse incentive: if medical costs are $100, the insurer can keep $15–$20; if costs rise to $200, it can keep $30–$40. Higher costs mean higher absolute profits. That is why existing insurers don't fight aggressively to lower prices. BUT an insurer that needed MORE than 15–20% for administration and profit would be extremely inefficient or would be taking advantage of its customers. The MLR limit is reasonable consumer protection. It could perhaps be revised, but it doesn't make competition impossible. Even if you create an efficient insurer with low costs, hospitals can use their contractual threats to block you. The fundamental problem is the hospitals' threats, rather than the MLR.
5. Very high administrative costs, accounting for 25–30% of total spending: The United States spends 25–30% of its healthcare budget on bureaucracy and billing, while Europe spends 5–8%. This looks like an enormous problem. BUT the solution is simple: vertical integration. You create your own hospital AND your own insurer. Your hospital bills just ONE insurer (yours), and your insurer works with just ONE hospital group (yours). You can have simple internal systems without elaborate prior authorizations, billing-code games, or denials and appeals between entities you control. Kaiser Permanente does exactly this in the United States and has much lower administrative costs than its fragmented competitors. Waste persists in fragmented systems: 100 insurers × 1,000 hospitals means 100,000 separate billing relationships. But vertical integration lets you avoid it. The fact that more companies don't do this suggests that the OTHER barriers (certificates of need, contractual threats, and immigration restrictions) are what actually block competition.
What I would change
If I could change the regulations, I would repeal Certificate of Need laws that allow hospitals to block new competitors; remove the ban on malpractice liability waivers so reasonable limits could be agreed by contract; ease immigration restrictions on healthcare workers by making visas and licenses easier for foreign professionals to obtain; and remove restrictions preventing Medicare from negotiating prices aggressively.
I would also outlaw contractual threats. A hospital threatening an insurer with “we'll leave your network if you include that cheap competitor” should count as unfair competition, just like price-fixing collusion or dumping.
Right now, we spend hundreds of billions a year on lawyers, billing, lobbying, and fights between hospitals, insurers, and patients instead of treating people. We have the resources, technology, and professionals, but we lack a system that allows competition to work. With the right regulations, we could have the same procedures at a fraction of the cost and free that money for research, better wages, or returning it to families. Instead, we spend it protecting monopolies.