Tuesday, November 3, 2009

Cost of Health Care

Why is the cost of health care so high? There are a number of therories.

*Not enough competition in the market for insurance (insurers are taking us for a ride). One explanation for why this might be true is that regulation prevents competition across state boundaries, and that health insurance companies enjoy an exemption from anti-trust policy. This has been the focus of Obama's health care reform argument. Scott Harrington discusses the angle here.

*Not enough competition in the market for care (health care providers are taking us for a ride). The argument here is that health care is an inherently local market, which can result in natural monopolies. This explanation seems to work best for care that is provided through hospitals, and less well for care provided through small clinics. Ezra Klein has some interesting charts to support this argument.

*Medical technology is highly valuable, and highly expensive (the best care doesn't come cheap). This idea can get very complicated very quickly. Patents on drugs and devices, the costs of R&D and FDA evaluation, the relative benefits (if any) of the latest technology over standard technology, the carrying costs of an expensive new machine that will only be used by a small number of patients each year versus the need to provide state of the art care, all play into this argument. Tyler Cowen links to some evidence that the health care system in the US is providing substantial benefits.

*Medical technology companies use monopoly power to inflate prices (drug and medical device companies are taking us for a ride). Similar to above, but with more emphasis on price, and less on value. Robert Reich notes how the whole issue is politically charged. Ira Glass discusses some ways in which drug companies extract inflated profits from insurers in this episode of This American Life.

*The incentive to over-consume health care (patients are taking us for a ride). Because copays are low, the argument goes, too many people visit their doctor for every minor head cold. Arnold Kling makes the argument here, and disambiguates this hypothesis from some of the others. Don Boudreaux makes essentially the same argument in more aggressive terms here.

*Costs of the uninsured (the poor/unemployed/illegal immigrants are taking us for a ride). The argument is that the uninsured are free-riding on the policies of the insured. Whether this is a good thing or a bad thing depends on who you ask. Whose fault it is is also up for debate. (More here.)

*Costs of the underfunding of Medicare (the government is taking us for a ride). That's right! Because the government is the government, it can require hospitals and doctors to treat Medicare patients, but not pay the going rate for their care. So who pays the difference? Well, the story is that health care providers make it up by charging privately insured patients more. So, potentially this practice could cost the health care provider some profit margin, or it could cost the insurer some profit margin, or it could come out of the pockets of privately insured individuals in the form of higher premiums (or some combination of the three). Uwe Reinhardt rebuts this argument, but to my mind his rebuttal lacks nuance on the question of who makes the price in each market. Remember that the market for health care for Medicare recipients is different from the market for health care for privately insured people (because the rules are different for each of these markets), and that the market for health insurance is a separate market still. In each of these three markets different players hold relative market power, and so have differing abilities to make prices. What I'm getting at is that maybe it IS true that the government sets the price in the first market, the hospital sets the price in the second market, and the insurer sets the price in the third market, with the end result being that the costs are shifted from market to another.

*Insufficient supply of doctors/surgeons/specialists (doctors are taking us for a ride). Regulation and licensing of health care professionals creates a barrier to entry to the health care provider market, keeping salaries artificially inflated, and thereby inflating costs of care. So do Doctors earn too much? Doctors say no. Alex Berenson says yes, as does Ezra Klein. In any case, greater utilization of Physician Assistants could help, especially in routine care where all that specialized training may be under used.

So, what do I think? I think costs are the symptom, not the problem. If the symptoms threaten the patient, then please treat the symptoms! But eventually the underlying illness has to be addressed. More on that in a later post.


  1. A symptom of what? All of these reasons are compelling, and all of them are overwhelming to address. The only way I can think of to control the outcome is to keep consumers from over-consuming health care, but I really see that as a very small part of the problem. It's the easiest to address, though.

    Someone said once that even cost-cutting strategies don't work in bureaucracies. The money saved is simply spent elsewhere; no one passes along the savings.

    And the costs get passed along, like you said. I think that it's sort of funny that there is a debate about whether doctors make too much money or not enough; obviously they make a lot of money, but their costs are astronomical. (I wonder, if we manage to fix a few of those bugs, even just a few of them, will we stop suing doctors for everything that goes wrong?)

    I have an intuition that all these problems are really one, and I think you're alluding to that too. I'm anxious to hear you elaborate on this.

  2. A symptom of what? Well, I'm going to get to that in another post soon...