Thursday, December 31, 2009

Rising Expenditure on Health Care

Here's the source. Hat tip Greg Mankiw.

Don't get me wrong, I'm very sympathetic to this argument. When there's a disconnect between a person's use of a resource and their cost for using the resource, overuse is the likely result. It's the tragedy of the commons all over again.

However, this graph does not by itself prove that the rising cost of health care in the U.S. is caused by insured people running to the doctor every time they get a runny nose. It's probably a significant factor, but I doubt that it's the only one.

Personally, I would like to know more about the relative market power of health care providers and health insurers, by locale. These two kinds of entities are in competition for the money that is paid by workers and employers for health insurance. When an insurer and a provider agree on rates for services, one or the other may bring considerably more clout to the table, and thereby become the price maker, while the other is forced to accept slim margins.

For example, insurers need to be able to tell potential customers that they will be able to go to a nearby facility for treatment. If there is only one health care provider in the local area (which is the case where I live), then the insurer will have to deal with that provider. The insurer doesn't have the option of simply walking from the negotiation table should the health care provider demand high fees for services. The opposite is true in an area where only one insurer operates while there are many health care providers competing for business.

I think it's interesting that in all of the discussion over health care, politicians have successfully demonized the insurance companies with allegations of price gouging (made possible by politicians who have regulated most competition out of the market for insurance), but have made no attempt to similarly attack health care providers for price gouging. I previously linked to graphs like the one below that suggest that health care providers may very well be culpable. I guess voters tend to like their doctors more than they like their insurers.


  1. I also don't like how that first graph makes you think the 2005 percentage is zero at first glance.

  2. I certainly like my doctor far more than my insurer. i think we all like to think that we're victims of insurance companies. Who wants to think that their physician is in on a separate, equally malicious quest to steal our money?

    And, what is with that first graph?? What does "as a share of total healthcare spending" even mean? That seems to make it nearly meaningless. Am I wrong?

  3. Harrison,

    Yeah, graphs can lie! At least to the incautious.


    I think that it means that if you added up all of the money that is paid into health care each year, a smaller and smaller fraction of that amount is coming in the form of direct out of pocket payments from patients.

    Think of it like this: If you used $500 worth of health care back in the '60s, you would have gotten a bill for about $200. Today, you'd get a bill for about $60. But that doesn't mean you didn't pay the other $440, you just paid it up front in your expensive insurance premium. So why's that a problem? Because reducing the amount of health care you consume doesn't reduce your health care spending, so you have no incentive to try and be frugal with health care. You pay for it whether you use it or not, so you may as well use it, right? But if everyone does that then pretty soon we're all using (and paying for) way too much health care. That's the argument anyway. On the other hand, who wants to go to the doctor and waste a couple hours waiting around if they're not really sick?

    I'm more worried about pernicious effects like this: I don't care how much I get charged for health care because I don't pay for it, so I don't argue with the hospital when they over bill me (or charge way too much for a service I need). My insurer eats the cost, but then next year raises my premium.