Why does health care in the United States cost more than it does in other developed countries? In 2003, Gerald Anderson, Uwe Reinhardt and two coauthors gave their answer in a classic Health Affairs article, “It’s the Prices, Stupid.” The argument: Even though Americans make fewer trips to the doctor, spend fewer days in the hospital, take fewer pills, etc., the prices we pay are higher than the prices people pay in other countries — making the total amount we spend also higher.
This idea was revived the other day by Alec MacGillis who wrote in The Washington Post that the great failure of health reform was the failure to control the prices we pay for health care services. Chris Flemming at the Health Affairs blog also chimed in, reminding everyone that Bruce Vladeck and Thomas Rice reiterated the argument last year in Health Affairs.
Now although I like Gerald and Uwe and Bruce and Tom, and have great respect for all of them, I’m sorry to say that they are wrong, wrong, wrong, wrong, wrong and wrong. (That’s wrong six times over.) In particular:
- Prices are a completely unreliable guide to the social cost of health care in all developed countries.
- The real social cost of health care is reflected instead in the opportunity cost of the resources used.
- When comparing real resource use, it is not obvious that the United States is spending more than other developed countries; we may be spending less.
- Although the state can use its monopsony (buying) power to suppress provider prices, this behavior only shifts costs from one group of citizens to another; it does not lower the real social cost of health care.
- Although squeezing provider prices may have a level effect on the amount payers spend, it appears to have no effect on the rate of growth of spending over time.
- The real problem (and the implied solution) is completely different: Prices appear to be reasonably controlled in every health care market when providers compete for patients based on price; prices are a problem only when third parties are paying them.
As my colleagues and I pointed out in our international survey of health care systems, the market for health care has been so completely suppressed throughout the developed world that participants in it almost never face a real price for anything. Consequently, when you sum over all the artificial prices and arrive at a total, no one knows what the number really means. The fact that the U.S. number is larger than the number for France or Germany tells us almost nothing about the real cost of care.
As every student learns in Econ 101, in a guns/butter world, the social cost of one more gun is the amount of butter you have to forgo, and vice versa — whether or not this cost is reflected in the prices people pay. In other words, the real social cost of health care is the value of the resources used to produce it — resources that could have been used to produce something else.
On this score, the United States actually looks pretty good. We use fewer doctors per capita, fewer nurses, fewer hospital beds, fewer pharmaceuticals, etc. than the average OECD country. The only thing we use more of is technology. And the care we get is as good or better than the care delivered elsewhere. (See the international survey, for a summary of the evidence.)
What does government accomplish when it suppresses provider fees? Suppose it could somehow cut them in half; and in so doing, cut in half the (accounting) cost of care. Does this maneuver lower the social cost of care? Of course not. It merely shifts costs from patients and taxpayers to providers. Exactly the same result could be achieved by a 50% special tax on provider income, used to reimburse patient medical expenses.
But isn’t it a good thing to lower the net cost of care for patients? Maybe. But no one has ever shown why doctors, nurses and paramedical personnel should bear this cost. Why not instead tax NFL football players? Or rock stars? Or Seventh-Day Adventists? Or everyone in the state of California? Or every member of the Democratic Party? Aside from a special tax on doctors being arbitrary and unfair, there are supply-side effects. The more we suppress provider incomes, the fewer providers we will have. At least we will get less of the best.
Some have argued that we can replace the doctors we lose with immigrant doctors. But that same argument also applies to steelworkers. Or to the whole of manufacturing. Theoretically, we could greatly lower the cost of manufactured goods in the U.S. by suppressing worker wages and replacing those who quit with immigrant labor. Does this appeal to you? If not, why pick on doctors?
[Parenthetically, yours truly is one of the few health policy analysts who appears to actually like and respect those in medical practice. It's amazing how many of my colleagues seem to hold them in contempt.]
What happens to nominal spending when government exercises its monopsony power and suppresses provider incomes? This results in less income for doctors relative to other occupations. There also appears to be a onetime dip in the level of health care spending. But from that new level, there appears to be no effect on the rate of growth of spending over time. Over the past four decades, the rate of growth of real per capita U.S. health spending is just below the European average! (See data for 1960–1998 here and data for 1994–2004 here.)
Source: OECD Health Data, 2006.
Finally, the real problem in health care is not now, and never has been, prices. It is the suppression of real markets. Third-party payment prevents providers from competing for patients based on price and quality. Wherever third-party payers are absent (cosmetic surgery, Lasik surgery, walk-in clinics, surgi-centers, concierge doctors, medical tourism, etc.), the price system in health care works just fine and dandy.