Discussions of America's crappy healthcare system, online or in-person, can be a bit confused. Not that I'm particularly enlightened, but I've read some books lately and I can now offer a few points to help clarify these debates.

First the facts. The US spends more than its peers and gets less bang for buck, as a country, though the rich enjoy the best healthcare in the world here. The biggest reason we spend so much is administration, though other factors are significant. These will probably be the least controversial sections.

Next: what to do about it. There are two ways to achieve universal healthcare in the US: single-payer (Medicare for All) and (competently designed) multi-payer. Obamacare moved us toward the latter but not enough. Countries with multi-payer insurance systems don't necessarily spend more on healthcare than those with single-payer; it depends on the design, though single-payer is probably easiest and most efficient, and has some heavyweight experts behind it (with caveats). Still, I'll present what I think is the best case for a well-designed multi-payer insurance system.

Bang for buck

Higher Cost

The US spends more on healthcare than other countries, by far, even after accounting for our higher real GDP per capita (a proxy for willingness and ability to pay) and the age of our population (pretty young compared to other rich countries). Read economist Uwe Reinhardt's 2019 book, Priced Out, for a full analysis, but the below chart illustrates the GDP point.

Countries above the line spend more on healthcare than what we'd expect for their income level, those below spend less, and those closer to the line spend about average. There aren't that many countries included so the word "average" might be doing some heavy lifting. Even so, it's clear that the US spends more than everyone else, by far, especially compared to its closest income-peer, the Netherlands, or much "richer" countries.

Lower Quality

We pay more, but we do not seem to get better bang for buck collectively, as a country. Rather, those who can afford the best healthcare in the world can get it in the US, but we fail to distribute healthcare as equitably as others. Luxurious facilities, cutting-edge treatments, and top talent are all here behind high gates. Good news if you're rich and selfish. Bad for empathy-havers, the poor, people with high-deductible health insurance plans, and temporarily embarrassed millionaires.

Cross-country comparisons of proxies for healthcare quality are fraught with omitted variable bias. Life expectancy, infant mortality, and other commonly used metrics are also affected by economic, sociological, public health, and personal factors like lifestyle. Here's just one example:

The United States has fewer hospital beds per capita than most other countries, but this measure may be confounded by increasing efforts to deliver care in less expensive outpatient settings.

A good measure might be Mortality Amenable to Healthcare, deaths that could have been avoided with prevention, or timely and effective treatment. The technology exists to avoid such deaths, but some countries avoid more than others. On this measure, the US healthcare system performs much worse than all of its peers. You can't see it below (go to the original source), but in 2018, the last year for which this chart has complete data, the best performer was by far Switzerland, followed by Australia, then France, Japan, and Sweden.1

During the first year of the COVID-19 pandemic, avoidable deaths in the US spiked to an at least 20-year high, while the OECD average (at least those fewer countries for which data are available), dropped. But again, differences in public health measures might confound things here, and I won't wade into that debate.

Why

According to the Commonwealth Fund, the biggest contributors to the difference in healthcare cost between the US and peers are:

  1. 1.

    Administration;

  2. 2.

    Provider salaries;

  3. 3.

    Drug prices.

Admin

The US has high healthcare admin costs. Both private insurance companies and providers hire many more staff to handle coding, claims, billing, and marketing than those in other countries do. Other countries have private insurance firms, but they're nonprofits. (Public payment systems in the US like Medicare, Medicaid, and Veterans Affairs have low admin costs, but we'll get to those.)

The Commonwealth Fund estimates that 30% of the difference in healthcare costs between the US and peers is due to admin costs, split evenly between insurers and providers.

Salaries

US doctors and nurses earn more than those in other countries, even after accounting for their much higher student debt and malpractice insurance premiums. This accounts for 15% of excess health costs in the US.

However, research suggests that total healthcare spending would drop by 6% if US doctors earned Sweden's mean, by less compared to Canada or the Netherlands, and even less if US doctors' position on the country's income distribution matched those other countries.

U.S. physicians earn substantially more than their counterparts in Canada, the Netherlands, and Sweden, but much of this difference can (statistically) be attributed to higher incomes at given percentiles of the overall U.S. income distribution. The U.S. income distribution is more dispersed than that in these other countries and, in particular, features higher incomes at the top. This fact, rather than differences in physicians’ relative locations in the income distribution, statistically explains the bulk of the U.S. physician earnings premium. Economically, this could arise from physicians’ labor market alternatives and from high-income consumers’ willingness to pay for health[.]

Prices (market power)

The same brand-name prescription drugs cost more in the US than elsewhere, 256% more than in the rest of the OECD in 2018 according to RAND. Generics, however, are less expensive. The same procedure is also more expensive here than in other countries.

It's because of bargaining power. Each insurance company negotiates with each provider. When negotiations succeed, the provider enters that insurer's network and charges the insurer lower contract prices instead of "sticker price" (which is more of an academic concept than an existing number that hospitals know). Big hospital networks have much more sway over prices. As we'll see later, other countries do more than the US to combat provider market power and control prices.

Medicare (the US one) famously has a lot of market power, so much so that in 2003 the healthcare industry successfully lobbied our government to ban Medicare from negotiating drug prices. The 2022 Inflation Reduction Act lifted this ban for some drugs. The Commonwealth Foundation covers this.

What is universal healthcare?

The US has both public (Medicare, Medicaid) and private sector (United Healthcare, IBX, etc) health insurers. There are also public2 and private sector healthcare providers.

Usually, in the US, when advocates call for universal healthcare, they mean the government should offer health insurance to all residents, from cradle to grave, by either expanding Medicare or creating a separate public option. They usually do not mean that the government should also provide all healthcare directly through public hospitals. This distinction between our healthcare payment and provision systems is important if you want to navigate bad faith criticisms of any attempt to expand healthcare access.

Going back to the Truman administration, whenever Democrats try to reform healthcare in any way, interest groups like the American Medical Association and conservatives cry about "socialized medicine". Originally this meant public provision, not public payment, but it's a pliable term that can refer to any regulation of health care at all. Even though Obamacare expanded access to private sector health insurance for people who can't get it through an employer, it was called socialized medicine.3

The poster-child country whose government provides most healthcare is the UK, though Sweden's less distressed system is under-discussed. Again, those in the US pushing for Medicare for All almost never mean that we should also nationalize hospitals and make most doctors public servants, but that doesn't stop opponents from pointing out problems with the UK's NHS instead of Medicare in Canada and Taiwan.4

The below diagram demonstrates the mix of possible healthcare payment and provision systems. The US's mostly private healthcare provision system is similar to most developed countries, and its most plausible reform scenario is to one day adopt universal health insurance without nationalizing provision itself. That leaves us with two possible healthcare payment systems: single-payer (Medicare for All) or multi-payer (the "Bismarck Model") insurance.

How are you going to pay for that?

Taiwan used to have a healthcare payment system similar to the US: many of those who couldn't afford insurance went without. When economist Uwe Reinhardt helped redesign Taiwan's system, they chose a single-payer M4A-type scheme. Despite his advocacy for single-payer in other countries, Reinhardt advised against it in the US because, he believed, our government is too captured by special interests to competently administer Medicare for All for society's benefit.5

After Reinhardt's passing, I see no other prominent figures making this corruption argument against M4A, and I don't quite buy it myself--after all, Medicare isn't perfect but works better than the current private insurance sector--but I do find that the alternative to single-payer health insurance, multi-payer, is a bit misunderstood in US discourse. Journalist Ryan Cooper, for instance, made a good video about US healthcare recently, in which he judges multi-payer payment systems, as in Germany and Switzerland, too expensive. He admits that these comments were made off the dome, so I don't begrudge him, but I want to add a stronger case for multi-payer here, even if I don't personally prefer it over single-payer, because Obamacare gestured toward multi-payer6, and because those opposed to M4A, quite frankly, need to advance a decent alternative if they want to win.

In countries following the Bismarck Model7 of multi-payer health insurance, there are many competing insurers, all of them private, nonprofit organizations. The government mandates that all insurers must cover every single procedure and medication on a central list. In turn, all residents must have health insurance, and most get it through their employer, who splits the premiums with workers. If someone becomes unemployed, the government picks up the employer's tab, so job loss isn't insurance loss. In countries with well-designed multi-payer systems, insurers' claims departments are small, hospitals' billing departments are small, more of the money is spent on actual healthcare, and the total spent on healthcare by the entire country is much smaller than in the US.

Cooper is correct about Germany and Switzerland; they spend more on healthcare than other developed countries.

This is partly explained by income: Germany and Switzerland are richer than many other countries8, so of course they spend more on a normal good like healthcare. But even when you compare them to similarly wealthy peers, they still spend a bit more. In the below chart, countries located closer to the line have healthcare spending closer to the average for their income level. Germany and CH are above their expected spending levels.

But there's another country on the multi-payer model that spends less on healthcare than both Germany and Switzerland, and about what you'd expect for a country at its income level: Japan. They even spend slightly less than their closest peer (New Zealand).

How does Japan do it? A big reason is price negotiation, how insurers and providers decide what each procedure will cost. I already discussed above how the US allows big hospital networks to wield a lot of power to keep prices higher. In Germany, insurers are allowed to form regional blocs to negotiate with providers, giving them more market power, which lowers prices; this is called an all-payer cost system. In Japan, the government negotiates prices on insurers' behalf, maximizing payer market power to reach bargain bin prices.

The bottom line: in Germany, Switzerland, Japan, and other multi-payer countries, when you walk into a hospital, you pay the same price regardless of your insurance,9 and prices are lower. Maryland, at least, took notice and implemented its own all-payer system. If we want the Bismarck Model in the US, it needs all-payer negotiations at the very least, or Japan's government-negotiator model.

Choose your character

So the US actually has two flavors of universal health insurance to choose from. Or, multi-payer might even lead us to single-payer one day.

Third Way is the most committed to the multi-payer direction, proposing cost caps, subsidies, and automatic enrollment instead of an individual mandate. I don't see all-payer in there, so private sector insurance would still create a complex mess. Presumably, people could still opt out, like with a 401k, so death spirals are still possible.10 But, like the ACA before them, Third Way would also take a major step toward single-payer: they also propose expanding Medicare to everyone aged 55 and over.

Meanwhile, NJ Senator Andy Kim's MediKids bill would put everyone aged 26 and under on Medicaid. Single-payer by a thousand cuts might be the best strategy.

Theoretically, we could even embrace multi-payer first then naturally evolve into single-payer. Paul Krugman advocated for a public option in 200711 because, he argued, it would eventually outcompete private health insurance due to its lower admin costs and hence premiums; eventually, almost everyone would be covered by this single payer. But, he noted, you need an individual mandate, community rating,12 and premium subsidies in order to make multi-payer work humanely, and, as Reid added, you need all-payer to make it work sensibly.

No matter how you shake it, Ryan Cooper's overall point stands: multi-payer systems need a lot of work to make private actors do what governments do more efficiently. Design wisely.