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Why Does Our Health Care Cost So Much?

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We know that the U.S. has the most expensive health care in the world. But beyond noting that dubious achievement, we seldom ask why. On my recent visit to Canada as a Fulbright scholar, I stopped by to pose that question to one of their leading health care experts, David Dodge, an economist who has served as federal deputy health minister and seven terms as governor of the Bank of Canada.

Right away he focused on the health care cost dilemma facing both our countries. "Medical technology is fascinating in that it is like consumer electronics in generating new products at a prodigious rate," he said. "We're on the verge of another burst of new products when we learn how to use genetic data." It will change medicine, Dodge said, and will be a "quantum leap" into the unknown in the next quarter of a century, both medically and financially.

Nonetheless, Dodge quickly drew a distinction between medical technology and consumer electronics. While the health care industry continues to pump out new products, they cost more than the old ones, but the price of the old technology doesn't come down as it has with consumer electronics like computers and television sets. "Why hasn't the price of cataract surgery fallen by 90 percent with the introduction of new laser techniques," Dodge asked. "The price has fallen a little, but not much. You used to be in the hospital two weeks for the surgery. Now it takes ten minutes."

Dodge threw out a possible explanation: "Perhaps something is wrong with the economic mechanism." The market doesn't seem to work. Maybe health care is different from other goods and services, as I've argued in this space. He brought up another example: In Canada, geriatricians are the lowest paid medical specialists and yet there is enormous demand for them, he explained. If the normal forces of supply and demand were working, high demand might raise the price for their services. That's the explanation the oil industry gives when gas prices rise.

Our conversation that day in Ottawa didn't produce definite answers. Dodge speculated that maybe health care markets don't work because patients usually don't feel the pain of paying their bills directly. In Canada, provincial governments pay them. In the U.S., Medicare, Medicaid, or employer-based health insurance pay most Americans' medical bills.

He also suggested that self-regulation of the medical professions in both countries might partly account for the lopsided supply and demand equation when it comes to physician payments. "Governments understandably don't want to take on the self-regulatory aspects of the professions," Dodge told me. In other words, they don't want to interfere too much with the prices professionals charge. In Canada, as in the U.S., most doctors receive fee-for-service payments. In Canada, though, the government may negotiate more forcefully with professional associations.

Patients are also somewhat to blame for the cost conundrum. Dodge noted that most people want to be treated by doctors rather than lower-cost nurse practitioners; when something is wrong they want to talk to doctors directly rather than someone else, even if that person can manage their care just as well.

And most people want the new (pricey) technology that promises the latest and greatest cures. My conversation with Dodge reminded me of the news in early December when the FDA approved a new drug for hepatitis C, a disease that's hard to treat and plagues some 170 million people worldwide. A three-month regimen of the drug Sofosbuvir carries a price tag of $84,000. That's $1,000 a pill.

Last week, NPR explored the high cost of that drug and questioned why it was so expensive given the huge market and likelihood that the drug maker would quickly recoup its initial investment. When NPR correspondent Richard Knox noted that experts suggested the price could be lower, a vice president for the drug company replied, "That's very unlikely we would do that." In other words, the drug maker simply didn't want to lower its price.

Those high health care costs in the U.S.? Something besides market forces is at work.

More Blog Posts by Trudy Lieberman

author bio

Trudy Lieberman, a journalist for more than 40 years, is an adjunct associate professor of public health at Hunter College in New York City. She had a long career at Consumer Reports specializing in insurance, health care, health care financing and long-term care. She is a longtime contributor to the Columbia Journalism Review and blogs for its website, CJR.org, about media coverage of health care, Social Security and retirement. As a William Ziff Fellow at the Center for Advancing Health, she contributes regularly to the Prepared Patient Blog. Follow her on twitter @Trudy_Lieberman.


Tags for this article:
Health Care Cost   Pay for your Health Care   Inside Healthcare   Prescription Drugs   Health Insurance   Health Care Access   Trudy Lieberman  


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Milly Dawson, MS, MPH says
January 8, 2014 at 6:57 PM

Interesting thoughts on the high costs of healthcare.

Several other possible contributors to the problem come to mind. One big issue is that we Americans have generally come to believe that there is a pill for everything that ails us. We are highly overmedicated; this contributes to massive health problems and avoidable costs. Basically we are paying a lot to create side effects and drug interactions when the initial problem might have best been addressed with behavior changes.

We also behave foolishly, as a nation, when it comes to end-of-life issues, often spending great sums of money to prolong life when all quality is gone. People fail to plan for end-of-life issues and discuss them with loved ones. This too jacks up health care costs a lot.

Hans says
January 11, 2014 at 3:43 PM

Healthcare Pricing: A Flawed System of Imbalanced Incentives

Prior to the 1960?s when health insurance was a rarity, consumers determined what they spent on healthcare (HC). Costs remained under 6% of GDP. Today in Singapore, where the consumer has control over HC expenditures with HC savings accounts, healthcare costs are less than 4% of GDP and have remained so for decades.

Today in the US, consumers have little say, insurers and healthcare providers determining how the consumers healthcare money is spent. Costs are at 18% of GDP and rising.

Near term, the incentive of insurers coincides with that of consumers, namely cost containment. Long term however, this incentive match breaks down, the insurer benefiting from higher costs which mean a greater volume of business and bigger profits. The incentive is to progressively provide more generous approved charges resulting in higher healthcare costs and higher premiums.. Healthcare costs could not have risen to the current 18% of GDP without the concurrence of insurers.

No wrong doing is implied. We have a flawed system of imbalanced incentives reminiscent of anti-trust events of a century ago that needs to be corrected legislatively.