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Why is Health Insurance So Expensive?

No Single Factor Explains Why Health Insurance Costs Are So High, But Paperwork and Lawsuits Play Roles

By David Fisher

Updated February 12, 2009

(LifeWire) - Question: Why is health insurance so expensive?

Answer: Health insurance in America is expensive partly because American health care itself is expensive -- at least when it's compared to the rest of the industrialized world.

The average annual premium on an employer-provided health plan for a family of four reached $12,700 in 2008, according to the National Coalition on Health Care, a nonpartisan research group. That was up 120% since 1999, rising four times faster than the annual growth in wages.

Employers continue to pick up most of the tab for their workers. But the portion of health insurance premiums paid by workers has also risen dramatically, according to the Kaiser Family Foundation's health insurance survey, with total increases averaging $1,600 per family since 1999.

Though an estimated 46 million Americans lack health insurance, by the California HealthCare Foundation's count, the International Organization for Economic Co-operation and Development estimated that total annual healthcare costs in the US reached $2.4 trillion by 2008. That's $7,700 per person or 17% of the nation's gross domestic product, the international group says. It's also 4.3 times as much as we spent on national defense and more than twice as much, expressed as a percentage of GDP, as health-related spending in countries such as Germany, France and Canada, which insure all of their citizens.

There is no single reason that health care and health insurance costs run high in the US, but several factors contribute, Princeton University researcher Uwe Reinhardt wrote in The New York Times in 2008. Among them:

Administrative costs. America's patchwork of thousands of private insurers, each with different rules, and a massive government-backed Medicare system for the elderly and Medicaid for the poor, each with slightly different rules and payouts in different states, load the system with a huge amount of paperwork.

A 2005 study led by researchers at the University of California at San Francisco found that administrative costs chewed up 25% of the nation's health care spending. Data generated by private insurers, doctors' offices and hospitals showed that insurers spent 10% of their premiums on billing, marketing and profit, and doctors spent 14% of their incomes on insurance paperwork.

Legal concerns. Fear of malpractice suits causes U.S. physicians to order more tests and diagnostic procedures than are ordered in most other countries, driving overall costs higher.

Provider power. Partly because no single insurer holds enough market power to impose cost controls, American hospitals, physicians and other providers tend to be able to set higher prices on specific services than providers in countries with more concentrated insurance systems. Consumers, who are typically poorly informed about the true level of their medical costs, also tend to do a poor job of shopping around or researching less-expensive treatment options.

Supply. Though Americans typically consume more of the highest-priced medical procedures over the course of their lives,  fewer hospitals, doctors and high-tech machines are in the US per capita than in most industrialized countries. Universal health coverage in those countries tends to drive up the demand for basic services, which drives up their supply and lowers their cost.

LifeWire, a part of The New York Times Company, provides original and syndicated online lifestyle content. David Fisher is a freelance writer based in Bend, Ore. He has worked as a financial adviser and has held insurance licenses in several states.

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