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.

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.