Why the American Healthcare System Underperforms

Healthcare in the United States is very expensive — but spending on healthcare does not match its outcomes.

The United States will spend a projected $4.7 trillion — or 18 percent of the national economy — on healthcare in 2023. On a per capita basis, the United States spends nearly double the average of similarly wealthy countries. Nonetheless, health outcomes are generally no better than those of other countries, and in some cases, are worse, including in areas like life expectancy, infant mortality, and diabetes.

The underperforming healthcare system lacks some of the factors that fuel innovation in other industries and countries:

• Consumers have not been cost sensitive because their employers and health plans often cover a large share of their costs, and because they lack the information required to assess quality and cost.
• Providers generally operate under a fee-for-service model in which they are compensated based on the volume of their services, rather than the value of the care they provide.
• Improvements in technology often make healthcare more expensive.

The result is a system in which, without reform, costs will continue to increase. Total healthcare costs — including all private and public spending — are anticipated to rise from $4.7 trillion in 2023 to $7.2 trillion by 2031, growing by an average of 5.5 percent per year, according to the Centers for Medicare and Medicaid Services. Healthcare spending is projected to grow faster than the economy, increasing from 18 percent of gross domestic product (GDP) in 2023 to 20 percent of GDP in 2031.

Such increased costs will be felt by all Americans — for example, in the form of increased prescription drug costs — as well as by the U.S. government in the form of higher spending on major federal health programs like Medicare and Medicaid.

A healthcare system with high costs and less favorable outcomes undermines our economy and threatens our long-term fiscal and economic well-being. Fortunately, there are opportunities to transform our healthcare system into one that produces higher-quality care at a lower cost. For more information on potential reforms, visit our solutions page and the Peterson Center on Healthcare.

Related: Why are Americans Paying More for Healthcare?