What Makes the US Health Care System So Expensive?

Here's a shout out to Austin Frakt and Aaron Carroll at The Incidental Economist for their blogging about health care.

In particular, Aaron Carroll's series on What Makes the US Health Care System so Expensive does a very good job of locating the sectors where the US health care system is more expensive than we would expect compared to other countries (it's less good at identifying why these sectors are expensive but we have to start somewhere.)  The link is to the introduction to the series.  Aaron's post on Red Herrings was especially good.

Austin has also put together a useful set of powerpoint slides on the US Health Care Crisis.  He invites you to steal these for your classes or talks or just to read.


A good start. My god, it's nice to know someone actually wants to understand it before we completely rip it out. But the pie chart is very confusing. 2/3's of it is "other." So, it's hard to tell if everything isn't more expensive than "expected." And why do we "expect" anything in particular anyway? And what are those little slivers labeled doctor salaries?

Agreed, this was a very thought provoking series of posts.

Thanks, a great resource.

The other is what a similar nation to the US that spent at trend would spend on health care. His info comes from a McKinsey study that broke the problems down very clearly (essentially that the US has several small problems (drugs, high pay for doctors, lots of nurses, too little preventative medicine, for profit insurance, less healthy population etc) but the big cost of our health care system comes from treating inpatient care as out patient care, at a much higher cost than other nations (for the same outpatient care). The study is here:

The fact that they apparently use pie charts puts me off reading them. Pie charts are stupid.

I think that the problem is the lack of consumers shopping for price. The market has recently been addressing this problem but few like the solution. The solution is fewer employers providing health insurance for their employees and more of those that still provide it are increasing he deducible. When employers drop insurance people often opt for a higher deductible policy.

It was OK when medical spending was less than 5% of the economy to have insurers, employers and Government do all the shopping but with it now 20 percent of the economy we need better incentives and more eyes on the problem and that means we need more direct consumer spending.

Government is moving to slow this correction because the correction promises to be painful for some.

I advocate huge deductibles for the rich and middle class. After all you cannot subsidize the middle class.

As far as price-shopping is concerned, not only is it difficult to get a quote for service, but the "deals" that insurance companies make with providers make it a complete opaque mess: basically, the price you pay depends on your insurer (and usually is maximum when you're paying out-of-pocket !!!).

a. Make providers publish the price for each service, and forbid insurance-based adjustments.

b. Kill the stupid employer-provided, mess-generating, competition-killing plans. Seriously, each insurance company has hundreds of plans "taylored" to their customers, and employees have maybe 2 or 3 to choose from.

c. Have people purchase plans in a centralized exchange when you can gauge the plan cost vs. flexibility in choosing providers (cf. a. above).

d. Subsidize a fixed amount (median plan cost minus x% of income) for lowest-income earners while legally capping out-of-pocket costs.

Then you have a shot at a working market-based system. Still, central planning empirically yields better cost/performance. HR3200 (probably ?) does c and d, but misses a and b to actually have a chance to curb spending.

A perception of risk from torts may be a factor, but most notable is the high cost of education, which is frequently impacted by issues like accreditation and research costs, but also simply the ability of universities to make a profit and use it to fund other areas of the university.

I find their work to be lopsided, because they so clearly skirt the issue of HSAs (mentions at the site are few and far between) - which are a HUGE part of the solution - on the insurance pricing side....

I've pulled plans #'s on 50+ different profiles (age, sex, health, smoker, state, family size) and in almost every single case.... optimum play is to bank $6K (the maximum tax deductible plan) in a HSA on a $7K deductible - $10K deductible if you want to take the risk on put of pocket later, to save a bit on your monthly.

This works for groups, large / small, individuals...

On the medical pricing side, we still need lots of work, but it shouldn't be to hard to accomplish with some basic crowd sourcing.

When you need Service X, seeing actual prices for said service on a Google Map isn't hard.

What does matter is this... once you have found the cheapest doctor to do Service X - and the price is BELOW what your insurance company would pay for it - you need to be able to pay out of your HSA acct. so the doctor gets CASH - and have that amount count against your deductible.

This doesn't happen easily. People with HSAs are more than willing to screw doctors down past what their insurance will pay - to keep the money in their account, but the insurance company should be GLAD, you are reducing the risk on them paying out past deductible.

Doctors ALL have a cash price, but you can't force them to deal with Insurance companies after they take the card swipe.

The changes needed are small, and frankly if an economist has been studying this stuff and not reached these conclusions, they aren't really economists - they are Krugman.

Insurance is what makes it so expensive. Third party payer -- private and government -- drives up demand, which drives up prices. The fact that insurance -- private and government -- won't pay for certain services, with no apparent pattern, means hospitals will charge more for all services to make sure the ones covered will be covered, since they also cannot count on the patient to actually pay for it -- and the law states that not paying for medical services cannot harm your credit, so that incentive is taken away. All of this contributes to higher health care prices.

Draw a similar curve for education spending in the U.S. vs other countries.

It looks the same.

So why aren't people complaining that we spend too much on education in the U.S. and that it's a crisis?

We spend more on Health care in the U.S. because we are wealthy enough that we want to consume more of it.

Reposted comment I made on their blog...

I am trying to understand what the lawn green two thirds of the pie chart from the Red Herrings means†¦ If that 2/3 represents overspending on items not otherwise accounted for in the pie chart, then does it not imply overspending caused by the structure of the health care system itself?

Could this waste be as a result of duplicate spending from competing interests? While each of 5 to 10 insurers may not have administration costs that are that much higher than in other countries, for example, running so many organizations at the same time could mean spending a lot more on administration than a country with only 1 central administration. Similarly, having competing hospitals, ambulance services etc. could mean more money going to each simply to operate. It would most certainly be interesting to know to what degree the amount of redundant health service delivery affects that pie chart.

Perhaps outlining the relative percentages of people employed in each area of health delivery by country would show such a difference were it to exist.

Quite a good article,thanks for your sharing.I Like it.

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