The cost of health care reflects the power imbalance between seller and buyer 


Why do health experts around the world get so upset about proposals to privatised healthcare? Wouldn’t private health insurance companies be more efficient at managing health services than the government-run services?

It’s called the health funding paradox. In a nutshell, size sets prices. The health industry is comprised of the wealthiest corporations, unions, associations in the world. Together, they easily overshadow private companies and demand excessive prices for their goods and services. 

The larger the health purchaser, like national governments, the lower the prices they pay. The smaller the health purchaser, the more they pay.

General funding principles

Healthcare is the most powerful industry in the western world. 1 in 6 dollars in the American economy flows through the health industry. Healthcare is the largest employer in Australia. No doubt it is the largest employer in America. Healthcare is a monster industry. 75% of political lobbyists in America represent the health care sector. No doubt the figure is similar in Australia.

The American’s fully private heath system currently spends double the amount of money on healthcare, that similar countries with public health systems spend. For example, Australia spends 8.9% of its GPD on healthcare. America spends 17.7% of it’s GPD on health, or 2.6 trillion USA dollars a year. However, this huge rise in cost, is not related to the number of Americans actually receiving healthcare.

Americans have fewer doctors visits than people from similar countries. They also have a lower life expectancy and higher infant mortality rates than other people. So why are they paying so much money? 

The Americans costs are related directly to the huge prices they are paying for tests, drugs, medical devices and hospital treatments. All the major health items cost more than double for Americans than they do to all other similar countries. For example, American health insurance companies pay $215 for one script of Nexium, a common heartburn medication.

Most Western countries purchase pharmaceuticals directly from companies, then on-sell them to local governments or private insurers. This drives the price down. American governments are legally unable to do this, so the private insurers all have to try and buy them direct. Their lack of buying power show up directly in the huge price mark ups they pay. This markup gets passed on directly to Americans who have private insurance.

Here are some other examples of price markups.

– Angioplasty (including doctor’s fees and hospital costs) came to $8,991 in Australia. The same procedure in America came to $61,649.

– Bypass surgery (including doctor’s fees and hospital costs) in Australia cost $ 43,230 in Australia. The same procedure in America cost $150,515.

– A hip replacement (including doctor’s fees and hospital costs) in Australia cost $27,810. In America, it cost $87,987.
– A caesarian section (including doctor’s fees and hospital costs) in Australia cost $10,566. In America, it cost $26,305.
– One day in hospital in Australia cost $1,472. In America, it cost $12,537.

Rebranding of products

Nexium is a re-engineered version of an older drug called Prilosec. The patent was due to expire in April 2001. Instead of becoming available to countries at a far cheaper generic price, a very similar drug was aggressively promoted. The patent for Esomeprazole (Nexium) was taken out in March 2001. The process of keeping drugs ‘in patent’, and at a higher cost to both private health insurance companies and governments has been widely documented, and is referred to as evergreening

Fee for service

There is another health funding paradox, driving up costs. Fee for service means the more you ‘do’ with a patient (writing scripts, ordering tests, making hospital admissions and delivering medical treatments) the more you actually get paid. This encourages over servicing, fraud and waste. It is estimated the 1/3 of health spending in America and Australia does not result in any improvement in patient’s health. Health reform groups in America and Australia want to replace fee for service with a ‘whole of treatment fee’. This would result in more coordinated care and allow quality to be monitored. Conservative medical associations and many health lobbyists oppose this funding model. It could result in fewer profits for them.

The private health insurance catch

Obamacare has begun to bring health insurance to ordinary Americans. But many people are discovering their health plans come with massive out of pocket ‘co-payments’. Sound familiar to Australians? Some Americans are finding it cheaper to buy heath services offshore, in Asia or Europe, than to go through heath insurance companies in their country and face huge out of pocket costs.

Australia had a Senate Enquiry into out of pocket medical costs in 2014. We are now third in the world for medical out of pocket costs, behind Switzerland and America. Every media outlet in the country has published stories of ordinary Australians, who thought their private insurance would cover them, and instead were left bankrupt after private medical treatments.

The reason for health insurance costs are higher prices that private companies are paying for everything from prosthetics to pharmaceutical drugs. The same items that cost far less in government run health services.


High Prices – The New Yorker – Malcolm Gladwell – October 25th 2004

Explainer: evergreening and how big pharma keeps drug prices high – The Conversation – Hazel Moir and Deborah Gleeson – 6th November 2014

An MRI costs $1,145 in America and $138 in Switzerland. But Medicare could change that. – Ezra Klein – Vox – 19th January 2015.

21 graphs that show America’s health-care prices are ludicrous – Ezra Klein – The Washington Post – 26th March 2013

America’s Bitter Pill: Money, Politics, Backroom deals and the fight to fix our broken health care system – Steven Brill – Amazon – 5th January 2015

Could Abbott end Medicare? – Independent Australia – Shaun Wilson – 10th January 2014.

Wikihospitals February 2015