A friend of mine recently asked me this in an online discussion forum. My response is below. It’s basically a condensed version of this post I wrote last year, with the demand side arguments in narrative form instead of a list.
US healthcare is so clumsily organized because 80 years of incessant government tinkering with the healthcare market have left us with a system where nobody pays for their own healthcare, nor even their own health insurance. It is so absurdly expensive because such a system eliminates cost-consciousness among consumers (thereby inflating demand) while also inhibiting competition among providers (thereby restricting supply). This creates a vicious cycle similar to the one I described in higher education, wherein healthcare companies reap massive rents by charging whatever they want.
The origins of this system probably lie in post-war tax incentives designed to expand health insurance coverage by taxing non-cash compensation less heavily than regular wages. This intentionally pressured employers to divert ever-higher portions of their employees' overall compensation packages into "free" health insurance coverage (since a $5,000 health insurance plan would be taxed less than $5,000 in wages, etc). But then, it also unintentionally pressured insurers to charge ever-higher rates, for ever-more-expansive plans, which covered even routine healthcare expenditures formerly deemed uninsurable. What was previously *insurance* against uncertain health risks gradually became mere prepayment for inevitable future consumption, with a hefty overhead charge, and with no incentive to economize on that consumption whenever it did become necessary.
Obamacare compounded this problem by further broadening the range of healthcare services so-called "insurance" was required to cover, effectively prohibiting the low cost, high deductible plans that motivate cost-consciousness. A variety of state-level "Patient Bill of Rights" laws did the same thing. And of course, Medicare, Medicaid and TriCare function the same way: someone else pays, providing you infinite healthcare with no incentive to economize.
The result is that 100% of retiree-aged and 85% working-age Americans currently have health insurance plans assigned to them by someone else, instead of shopping for it themselves. They have no idea what their plan costs, nor any motive to reduce those costs, nor any feasible method to do so if they wanted – they’d literally have to quit their job and uproot their life to switch plans. Whatever their plan covers, they consume as much of as they want, without regard for price - not even the doctors know what it costs. When healthcare providers grew wise to this, they completely untethered the price of their products from an individual's ability to pay (and instead advertised with an "Ask your doctor about ____!" strategy, knowing neither doctor nor patient would care what it cost). Meanwhile, the unemployed are not only priced out of the market for individual health insurance (by all the companies buying in bulk), but often priced out of healthcare in general (by all the providers up-charging insurance companies), in perverse opposite to the safety net effect originally envisioned by government architects.
That's just the demand side...without getting too much into it, here's 5 ways the government also drives up prices by restricting supply:
1. They've made it illegal to buy health insurance across state lines, which shields health insurance companies from competition.
2. They've heavily skewed patent law towards the inventor, granting legally enforced monopolies to pharmaceutical companies decades after a product's invention.
3. They've heavily skewed medical licensure and accreditation laws towards restricting the supply of doctors, nurses and other medical professionals, in ways that inflate salaries but create massive shortages. The AMA prevents the establishment of new medical schools, restricts the number of students the existing medical schools are allowed to train per year, prevents foreign doctors who've practiced for years in their home countries from practicing in the United States unless they redo their residency and exams, prohibits qualified nurses or physician assistants from offering standard treatments for routine illnesses without physician supervision, and goes to war against niche healthcare providers like midwifes optometrists due to vastly overblown worries about patient safety.
4. They've made it illegal to sell any medical product the FDA has not approved. This is problematic because the FDA has been a corrupt and captured agency from the outset, far likelier to protect industry incumbents (intentionally or not) than to protect the public. It also prevents dying people from trying experimental drugs, and prevents the re-importation of drugs *it's already approved* that are priced lower in other countries, for no fathomably legitimate reason.
5. It's illegal to sell your organs.