Why Healthcare Costs Are So High in the United States
27 June 2017 | Pago Pago, American Samoa
This is the real problem in the US, not Obamacare or the AHCA. It is the high cost of healthcare. According to public finance experts such as Alan Blinder and Alice Rivlin, control of health care expenditures is the greatest fiscal policy challenge facing the United States. In 1950, healthcare expenditures accounted for only 4.6% GDP. In 2009, they accounted for more than 17%, a larger share than all manufacturing, or wholesale and retail trade, or finance and insurance. So why are medical expenses so high and rising? There are several reasons.
1) First and significantly we have far too few doctors so the ones we have can charge prices that are too high. This is simple supply and demand. The US has 2.5 treating physicians per 1000 population, which places it 9th from the bottom of the top 36 OECD medically advanced nations. France has 3.3; Germany, 4.1; Switzerland, 4.1; Belgium, 3.0; Mexico, 2.2; and Austria, 5.0, for examples. We have too few doctors. Why?
For years the AMA blocked the accreditation of new medical schools and, when pressure was brought to bear on the AMA, it shifted the task of restricting schools and their size to state accrediting agencies with instructions, which took up the cause of limiting the supply of doctors, all to maintain quality we were told. The situation is easing, but we are still way behind. Between 1950 and 2009 the number of patient treating physicians per 1000 population increased from 1.4 to
to 2.5, but the ratio still has a long way to go and we remain near the bottom. Fewer treating doctors means higher doctor's fees and higher medical costs.
It has been estimated that due to these artificial restrictions on the supply of doctors. the prices charged by doctors are 35% higher than they would be if doctors were produced in numbers more comparable, on a per capita basis, to other OECD advanced nations. Since doctors fees comprise about a third of all medical costs, this factor alone implies medical costs are about 11 to 12% higher than they should be due to the shortage of doctors.
Solution: a federally required and funded accelerated program to produce more doctors as soon as practicable.
Secondly, third party payor arrangements (government or an insurer) encourage price gouging by healthcare providers. The $100 box of Kleenex on a itemized medical bill is notorious. Rather than quibble, insurers usually pay the bill and hike premiums as necessary. Self insured patients have successfully fought such bills in court. Government payors are getting much better, For example, Medicare is refusing to pay some high hospital and doctors charges and capping others. But insurance companies don't want to spend much time and effort which it eats into their profits, when excess charges can be passed along in higher premiums or larger deductibles.
Solution: require insurers to adopt the restrictions and caps used by Medicare, with adjustments as necessary, and possibly regulate healthcare insurers at the state level as public utilities. depending on the outcome of other partial solutions suggested below
Thirdly, doctors love fancy new medical devices so expensive new medical technology is being adopted which is not always cost effective in many cases although it can result in marginally improved treatments. No one monitors costs verses benefits in the individual instances. It is left to what the doctor's orders and the doctor's focus is always the best treatment possible and using the technology as much as possible in order to help cover its very high overhead.
The most important explanation for the increase in real per capita health expenditures is the cost of new medical technology and the cost of the increased training and specialization that it requires. Between 1974 and 2010 alone, the number of U.S. patents for pharmaceutical and surgical innovations increased by a factor of six. Bottom line: expensive medical technology is increasingly deployed, often in arguably questionable circumstances of proper need and that drives up medical costs considerably as hospitals and doctors try to recoup the higher overhead of new medical technology adopted. Doctors often run a hospital as a cooperative and choices are too often uneconomic.
Solution: require a cost benefit assessment on the deployment of new technology on a case by case basis to assure it is cost effective and justified and that revenues from it are not primarily being generated to cover the new technology's high overhead. This is key and not well understood.
Fourth, there is the problem of medical malpractice, lawsuits, too aggressive lawyers the "CYA" practice style that devolves from that mix. The result is very expensive medical malpractice insurance and even higher yet doctors' bills. The truth is over 80% of malpractice claims are generated by fewer than 5% of the physicians, but medical societies won't do anything much about it and insurers are hesitant to discriminate adequately on premiums. That said, about of third of deaths in hospitals can be attributed to medical malpractice. Johns Hopkins patient safety experts have calculated that more than 250,000 deaths per year are due to medical error in the U.S. Misdiagnoses and medical errors are the causes.
Solution: two thoughts: 1) revoke or suspend the licenses of those generating the most legitimate medical malpractice claims. 2) Limit medical malpractice claims to those of gross negligence and let the courts sort out what that means in a medical context.
Fifth, the healthcare market fails due to price and product uncertainty, as was explained years ago by economist Kenneth Arrow. A prospective patient does not know what kind of serious or even moderate treatment he will require in the future, when and where he will require it, how and by whom it will provided, and no one knows in advance what the full treatment package will consist of nor what it will cost. Medical bills are always different.
This product and price uncertainty results in a lack of meaningful competition between healthcare providers because buyers cannot shop around for the cheapest treatment package on big and medium ticket items. That is why health care providers price gouge, their prices vary wildly and they they are reluctant to talk about bills and costs, before or after treatments. Healthcare insurers could do more but it would cause them to forego higher profits. They prefer to just pass costs along in premiums and higher deductibles.
This lack of effective competition in healthcare markets causes them to fail and the result is higher medical costs.
Solution: This one is hard. Require periodic core procedure and treatment price publication disclosures by providers, and encourage or require insurers to shop around on what they cover under their policies. More thoughts?
Sixth, Americans want more and better healthcare now, especially the elderly and the aged which are a large segment of our population now, with boomers retiring and getting more medical treatment for age related medical problems. But the aging factor impact on costs is small and unclear. A small portion of the expenditure increase, typically 0.1 or 0.2 percentage points per year, is attributable to the aging of the population. It's not possible to estimate how much of the increase in expenditures results in higher health care prices and how much reflects greater quantities of care.
Solution: wait for boomers to die off. This is a more minor problem.
Seventh, there is wholly inadequate preventative medicine practiced in the US. Aside from Kaiser Permanente and a very few others, preventive medicine does not seem to exist. The problem is prevention is viewed too narrowly. For example, the standard view which wholly ignores public school lifestyle education, is while "the evidence does suggest that there are opportunities to save money and improve health through prevention ... [including those identified] by the U.S. Preventive Services Task Force, sweeping statements about the cost-saving potential of prevention, however, are overreaching."
I submit this view of prevention is too narrow and that prevention should include public education on diet, exercise, outdoor sunlight exposure and lifestyle instruction explaining what matters, how and how much, all in detail with all the data available. This is real preventative medicine and it is not seriously addressed. This type of preventative medicine is beyond the reach of providers so they ignore and discount it, but the lack of it in fact pushes up medical costs considerably. A great deal can be done here that isn't happening.
Eighth, price gouging by drug companies has sharply driven up the cost of healthcare. As a rule of thumb, the ratio 3:2:1 does a fairly good job of describing the relative costs in medical expenses of hospitals, physicians, and drugs. Drug companies claim their high prices are necessitated by research costs but the truth is they bum much research off the federal government and they spend more money on marketing than they do research. From lobbying, the drug industry have gotten legislation preventing Medicare from bargaining for more favorable drug prices and the right, when drug patents expire, to retain their monopoly pricing rights by buying up the generic production rights of competitors, in effect extending their patents. The FDA pushes up costs further by its own rules and regulations on what can be sold and many of these restrictions and requirements are nonsense or unnecessarily burdensome.
Solution: repeal legislation granting drug companies anti-competitive rights; clean up and streamline the FDA; and require that drug companies be regulated and operated as public utilities.
These are the reasons healthcare is so expensive in the US and no one is doing much about them, especially congress which does more damage than good in this area with laws and regulations bought by providers, insurers and the drug companies. Congress knows better and simply hopes the public doesn't.