Why are US Health Care Costs So High?

The US healthcare system is notable for its extremely high costs compared with all other countries, and poor results compared with other rich countries.  But the US also has the most unequal healthcare system and our poor outcome statistics are averages that are pulled down by people closer to the bottom of the distribution who get lower quality care here than they would in any other rich nation where there is universal health insurance.   So, does our system do well for the median American?

Unfortunately, our national priorities nearly ignore the median and fail to collect this information, so we will have to guess.  The US system clearly gives the median American very low benefit for the cost compared with other rich countries.  The median American pays regressive taxes to pay for healthcare (notably the payroll tax) and pays for expensive private health insurance on top of that.  In almost all rich nations, the amount the median American pays for health taxes would be less AND private expenditure would be MUCH less.

The median American has a high probability of losing health insurance at some point in life and no other rich country allows health costs to bankrupt families.  Medical expenses contribute to the majority of personal bankruptcies in the US.  Our system also provides less preventative care than most rich countries. This is often claimed to be a reason for our high costs, but I tend to think that preventative care does not save any money in the long run.  We all have to die sometime and when we get old, our illnesses and health expenses inevitably rise.  Preventing one disease just means that you will get sick and die from something else eventually.  But I am a huge fan of preventative care because it is the most cost effective way to raise health care quality.  There is no cheaper way to raise life expectancy.  But that just means that you will get sick with something expensive when you are 90 rather than when you are 70 and I have seen zero evidence that living longer reduces total health expenditures.  But who cares.  The whole point of health expenditures is to be able to live longer, healthy lives.

So why are US healthcare costs so high?  The main reason is that we have less government price controls than in other rich countries.  This directly reduces prices, and it reduces administrative costs.  The US has much higher administrative (billing) costs than other rich countries.  Probably the biggest reason is because there are different prices charged for different people to get the same treatment in the US.  There is constant negotiation over complex health pricing.  Buying healthcare is not like buying a gallon of milk with a clearly marked price tag.  Even mechanics give price estimates, but it is hard to get doctors to provide a price estimate on a caesarean section operation because they want to charge different prices to different people.  The extra haggling over variable prices raises our administrative costs.  In other rich countries, governments typically set price controls which means there is less negotiation and more price transparency.

Economists typically abhor price controls because of worries that they will cause shortages.  Does that happen in healthcare?  Not shortages of doctors.  Despite price controls in other rich countries, the US has fewer doctors per person than most, and fewer hospital beds per person.  Whereas the US does have more of some high-tech treatments like MRIs, our average health outcomes are fairly bad compared with most rich countries (as a new study in JAMA shows).  And some of our more abundant health ‘care’ is unnecessary and harmful.  We do far too many tonsillectomies and caesarean sections than is good for our health.

Critics of price controls point to Medicaid for evidence of how price controls create shortages.  Medicaid pays less than almost any other kind of insurance and so about a third of doctors refuse to treat patients on Medicaid, and many doctors claim that they lose money on their Medicaid patients.  They say that they only treat Medicaid patients because of being charitable.  Only 16% of Americans are covered by Medicaid, and doctors say they can afford this small amount of charity care, but that it should not be expanded.  Medicaid prices are actually higher than what doctors get paid in most other countries, so what would happen if all Americans were given free universal Medicaid insurance?  Would there be a even bigger doctor shortage because there would be less doctor charity to spread around?  I doubt it because it did not happen in other countries.  A few of the wealthiest patients might pay for more expensive treatment out of pocket or buy supplemental insurance for fancier care.  That has happened in other countries too, but very few people choose to spend the extra money beyond what the public universal system provides.  Most people prefer to get free care even if it sometimes means waiting lists in some places.  The market for high-paying customers would shrink and doctors would simply have to get by with lower incomes as they do in every other country.  People who do not like the free services are welcome to pay for better service, but almost everyone goes with the standard package.

You might then worry about doctors quitting and becoming real-estate agents, but it is doubtful that doctors could make as much money in any other occupation as they could make treating Medicaid patients full time.  And the incoming supply of doctors would not shrink because it it not determined by supply and demand anyhow.  The supply of doctors is mainly controlled by the doctor ‘union’ that controls medical licensing with government enforcement.  If the government wanted to increase the supply of doctors, it could easily do so.  The government already pays for most of the cost of medical school (directly through subsidies or indirectly by paying patient fees).  In a Medicaid-for-all world where lower prices reduce doctor incomes, there would be different selection pressures on who would become doctors.  There might be less competition for medical school openings, but it isn’t clear that the quality would go down significantly.  Some of the people going to medical school for the money rather than for saving lives might decide to go work on Wall Street instead, but they do not make the best doctors anyhow even if they are smart.  They are the US doctors who are performing excessive (and harmful) caesarean sections and tonsillectomies for extra profits.  Doctors would need less business savvy with set prices and could focus more on medicine rather than on pricing and billing.

I don’t believe that the main motivation for doctors to treat Medicaid patients is charity.  Doctors don’t give that much of their income away in other contexts, and when Medicaid reimbursement rates change, doctors don’t suddenly adjust their other giving to make up for the change in ‘charity’ that they claim to give Medicaid patients.  Most doctors profitably treat Medicaid patients for the same reason that airlines profitably sell some economy tickets for less than a fifth the price of their most expensive seats: price discrimination.  If airlines can fill up their seats for more than their marginal cost, then it is profitable.  The same is true for hotel beds.  The same hotel room can sometimes cost $100 and other times cost $300 but the hotel does not rent rooms cheaply out of charity.  It is better to earn a little money from the room than no money.  The same is true of medical beds.  The best way to make money is to always keep them full.  For most doctors, that means accepting some Medicaid patients sometimes.

Given the above evidence, the median person in other rich countries probably gets slightly better health outcomes overall and the median American certainly pays much, much more money for care and has a greater chance of medical bankruptcy and other financial stress.  So the US could improve our health system by learning how other countries are getting such good outcomes for so little cost.  Obamacare/Romneycare are two such attempts, but another alternative would be Medicaid for all.  That would work and it would be simpler, but more radical.