9 Why is Health Care So Expensive? Market Power and Competition
9 Why is Health Care So Expensive? Market Power and Competition
Caroline Krafft
Why does the United States spend so much on health care?
Health care is expensive. Figure 9.1[1] shows health care expenditure in the United States as a percentage of GDP. It also examines the sources of spending, comparing spending from the public sector (the government) and from private sources. Health care is a growing segment of the economy. As of 2022, a total of 17% of GDP went to health care, making it almost one-fifth of the U.S. economy. Around 9% of our economy is private spending on health care and 8% is public spending on health care. This share has been rising substantially; in 1987 private spending on health care was 7% of GDP and public spending on health care was 3%. A number of factors, including improvements in medicine and income, have contributed to this rise. In 2020, the COVID-19 pandemic contributed to the substantial rise in public health care spending particularly.
However, the United States is also an outlier in global health spending. While we spent 17% of our GDP on health care as of 2022, comparable countries spent on average only 11% of GDP (Figure 9.2).[2] The next highest spending country, Germany, spent 12% of GDP on health care, and most countries spent less than 10% of GDP on health care. The U.S. spends far more, yet has worse outcomes, in comparison to other countries. When examining 13 developed countries, despite high spending, the United States had the highest infant mortality (deaths) and shortest life expectancy.[3] Why is health care so expensive while outcomes are so poor? This chapter examines some of the drivers of the high costs of health care, with a particular focus on the role of market power.
Non-competitive markets
Market power: Are markets competitive?
Markets tend to work well when they are competitive – when they have many buyers and sellers (and no externalities or other market failures). However, many markets are not competitive, including most health care markets. Market power is when one firm can influence the price of a good or service. Market power is often measured based on the percentage of sales in a market that are sold by one firm (market share). Common measures of market competition are based on market shares. One measure, the concentration ratio is the sum of market shares for the biggest firms, for instance the three-firm concentration ratio is the sum of market shares for the top three firms. The concentration ratio thus focuses on top firms. Another measure, the Herfindahl-Hirschman Index (HHI) is the sum of the squared market shares of all firms. The HHI can range from 0 (highly competitive) to 10,000 (only one firm controls the entire market, a monopoly). In New Jersey, the four-firm concentration ratio for hospital systems was 88% in 2020, meaning that the top four hospital systems controlled 88% of the market.[4] In the U.S., 97% of metropolitan statistical areas (MSAs) have highly concentrated