Why is U.S. Health Care So Expensive?

Business writer Steven Pearlstein had an excellent article in yesterday's Wash Post about U.S. health care costs:

The reason the system has been so resistant to change is that lots of powerful interests do very nicely with things just the way they are.

Although doctors, hospitals, insurers and drug companies say they, too, want things to change, any comprehensive reform would reduce their incomes and their profits.

For example, the American Medical Association hopes no one will notice that American doctors make a lot more money than doctors elsewhere -- roughly twice as much. The average incomes of $274,000 for specialists and $173,000 for general practitioners are, respectively, 6.6 and 4.2 times those of the average patient. The rate in the other countries is 4 and 3.2.

MP: In "Capitalism and Freedom," Milton Friedman describes the American Medical Association as the "strongest trade union in the United States" and documents the ways in which the AMA vigorously restricts competition to achieve above-market income.

Pearlstein cites a recent study by McKinsey Global Institue that shows that "the U.S. spends approximately $480 billion ($1,600 per capita) more on health care than other OECD countries and that additional spending is not explained by a higher disease burden.

Instead, MGI found that the overriding cause of high U.S. health care costs is the failure of the intermediation system — payers, employers, and government — to provide sufficient incentives to patients and consumers to be value–conscious in their demand decisions, and to regulate the necessary incentives to promote rational use by providers and suppliers."

MP: Consumers of health care pay only 14% of health care costs out-of-pocket, and being insulated from the full burden of costs, there is no incentive to be cost conscious. If consumers aren't cost conscious, the providers of health care are much less likely to be cost conscious.