Arnold asks “Why some things get expensive”
No one denies U.S. healthcare is expensive. In fact, medical bills are leading cause of bankruptcy for Americans. But a more precise question is, are U.S. healthcare costs unduly high? What I mean is, adjusting for quality of care, malpractice, hospital conditions, prognosis, and a bunch of other variables, do Americans get their money’s worth relative to other countries, which may have cheaper healthcare but worse healthcare.
Crunching the numbers is a daunting task. I would need to know the healthcare policies of all major countries, patient surveys of satisfaction, costs paid, prognosis, etc. and then compare that data to the U.S., and then adjust for costs based on a utility function. For example, if cancer treatment in the U.S. costs 50% more than in the U.K. but has a 20% higher prognosis and 20% higher patient satisfaction, does that justify the higher cost? No one has actually done this. Most studies on healthcare compare must two or three countries and a few variables. But even patient satisfaction surveys can be of dubious value due to survivorship bias. Patients who live may describe their care as satisfactory, but those who die would obviously (if they could talk) not but are excluded from such surveys.
‘Cost disease’ describes the phenomenon of U.S. healthcare costs (and also college tuition) rising faster than it should, both on a nominal and real basis, with no obvious explanation. Everyone is wondering, why does healthcare cost so damn much, and satisfactory answers are so lacking in spite of the considerable amount of attention the issue has gotten. By measuring healthcare costs relative to quality, versus healthcare of other nations, we can better understand if Americans are truly overpaying. I have written extensively about cost disease, and my findings are: in recent decades, real healthcare costs have not exceeded inflation by too much (only about 1-2% per year in excess of CPI); second, my hypothesis is, Americans pay more but get superior healthcare as measured by shorter wait times, better and faster diagnostics, nicer hospital accommodations, more legal options if something goes wrong, and access to latest and experimental treatments. In many foreign countries, it’s not uncommon for many patients share a room and a single bathroom, which for obvious reasons is unsanitary. The last thing you want are a dozen sick people all using the same bathroom and breathing the same air, yet that is considered ‘standard care’ in many parts of the world. In America, if you have any mild pain or bleeding or other non-life-threatening symptoms, the doctors will run all sorts of tests, whereas in many foreign hospitals you will be turned away or have to wait a very long time unless you choose one of the more expensive ‘private’ options.
Also, many countries with universal healthcare do not cover elective procedures unless you wait a very long time or pay-up private care. This is why many sick Canadians, despite the supposed ‘superiority’ of their universal healthcare, seek treatment in America even if it means paying much more. However, in fairness to the ‘other side’ there are many instances of Americans who seek healthcare and drugs abroad, such as this example of an American with Tourette’s syndrome who saves thousands of dollars a year by buying Abilify in the UK. This is further evidence of the complexity off the issue, because clearly many Americans are dissatisfied with their healthcare, but also so are many non-.U.S citizens. On forums and in UK news, it’s not uncommon to read NHS ‘horror stories’ such as an 80-year-old Essex man who died after being forced to wait 23 hours for an ambulance, or people with tooth infections having to pull their own teeth with pliers.
Many Americas would be in for a shock if they traded in their existing healthcare for foreign healthcare–not just a cultural shock but the quality of treatments and accommodations being worse. Michael Moore in Sicko praises the healthcare of Cuba and Canada, but you can be sure when he gets sick he shops for the best doctors and hospitals he can afford, as he is very wealthy. However, this does not change the fact healthcare in the U.S. is expensive, and people’s lives are ruined due to healthcare costs, such as due to not being insured, or the insurance company not paying out, or being under-insured, or a bunch of other factors. Perhaps the wealthy benefit far more from America’s healthcare system than the poor and middle class. For life-threatening diseases, America’s healthcare system may be the best money can buy, but for smaller ailments it is too expensive.
How about single payer? As discussed in this excellent article Are You Sure You Want Single Payer?, it would have many drawbacks including hospital closures, longer wait times, and higher taxes. What people need to understand is, universal healthcare is paid for by taxes. But Americans are unwilling to have a huge tax hike to pay for it. Canadian and Brits pay, on average, 20% of their income on funding healthcare, which is much more than Americans do. The article Health care’s free in Canada, right? Wrong, and you’re paying a lot more than you think astutely points out, the 20% is an average figure, meaning the top 10% of earners are paying way more for healthcare on a relative basis than the poorest. This makes universal healthcare a good deal for the very poor bad a bad deal for the upper-class.
Overall, hospitals seem to be the biggest contributor to excessive healthcare costs. Hospital inflation exceeds other types of healthcare inflation:
It’s not uncommon for hospitals to add huge mark-ups to products that can be purchased online at a much lower cost, such as paper cups and cotton swabs. Hospitals have a lot leverage in terms of pricing, because when someone has an emergency and bleeding to death, it’s not like they can shop around for a cheap hospital. Hospitals benefit from subsidies and insurance, because they can just set an arbitrary high price and the insurer, which has very deep pockets, not the patient, pays. The common scapegoat for healthcare inflation, drug prices, is misplaced because even though pharmaceutical companies have profit margins of 20%, if drug prices were lowered 20% they would still be very expensive. Health insurance companies only have profit margins of around 5%. But even hospitals, despite their exorbitant patient costs, are still not extremely profitable, with margins of around 8%. Even if margins were cut to zero, costs would still be very high. Hospitals charge a lot , partially to offset uninsured, low-income patients who are unable to pay.
Another contributing factor are doctor salaries. American doctors are paid much more than foreign doctors ($250,000 vs. $150,000). If doctors did not earn so much money, the time and money required to complete many years of medical school and training would not be worthwhile, and also there is the constant danger of litigation.
Further limiting or eliminating Medicare could work, but would probably deny a lot of people healthcare. One of the reasons hospitals charge so much is to offset the losses from Medicare (which reimburses much less than private insurers) patients and the uninsured. Other solutions could include limiting end-of-life care and implementing rationing (for public healthcare), because it’s estimated 5% of patients contribute 50% to healthcare spending, often in the final years of life. People with costly diseases with poor prognosis would not be applicable for further treatment, except inexpensive palliative care which can include euthanasia. Bone marrow transplants, for example, are very expensive and have a poor to mediocre success rate, so the procedure would be unavailable under a rationed healthcare plan, although that does not stop people who can afford it or have private insurance from having the procedure. People can also learn to live with inferior healthcare. If healthcare were limited to OTC drugs and generics instead of nice hospital accommodations and cutting-edge treatments, it would be very cheap yet not very good. Or accept higher taxes in exchange for expanded universal coverage, which is my least favorite solution, and there should be an option to opt-out of universal coverage.
Third, because healthcare encompasses such a large part of the U.S. economy and overlaps so many sectors relative, to, say, electronics, this could explain why health inflation exceeds that of computers. Healthcare involves the convergence of doctors and nurses, technology, pharma, billing, insurance, legal, hospitals, etc…there are so many more components, and the more parts you have, the closer the total will match the overall inflation rate. But even electronics can have high inflation due to obsolescence and less reliability.