Ezra Klein is undoubtedly correct, even tautological, in his assertion about why U. S. healthcare is so expensive in his conversation with Kaiser-Permanente CEO George Halvorson:
There is a simple explanation for why American health care costs so much more than health care in any other country: because we pay so much more for each unit of care. As Halvorson explained, and academics and consultancies have repeatedly confirmed, if you leave everything else the same — the volume of procedures, the days we spend in the hospital, the number of surgeries we need — but plug in the prices Canadians pay, our health-care spending falls by about 50 percent.
The post has lots of nice graphs, by the way.
I’m not as confident about his explanation of why that might be:
In other countries, governments set the rates that will be paid for different treatments and drugs, even when private insurers are doing the actual purchasing. In our country, the government doesn’t set those rates for private insurers, which is why the prices paid by Medicare, as you’ll see on some of these graphs, are much lower than those paid by private insurers.
or at least about the implied solution.
I see no reason to believe that even if we went to a single-payer system that the federal government would be willing to lower healthcare prices so that we’re spending what France, Germany, or the Netherlands is. Despite the legislative mandate to do so that’s been around for about ten years they haven’t lowered Medicare reimbursement rates. Every year they postpone that painful choice and, indeed, they’re preparing to do so again.
I think that Ezra is relying too heavily on the “they just have to” theory.
This graph suggests something quite different: that if we could reduce what Medicare spends to what Germany, France, or the Netherlands spends on the same age cohorts that our total costs would fall sharply. Per unit cost is important but it doesn’t represent the complete story accurately.
Still, I laud Ezra for talking about costs. Welcome aboard, Ezra.
Update
Kevin Drum comments on the same Ezra Klein post and adds:
If we want to reduce healthcare costs, we have to do something about all that, but both Obama and the Democratic leadership in Congress have (quite accurately) decided that doing so right now would earn the undying wrath of doctors, Big Pharma, insurance companies, hospitals, and device manufacturers, and together they could easily kill any chance of passing healthcare reform at all. So instead we’ll pass reform now without addressing prices and then hope that maybe we can do something about it later.
Engaging in wishful thinking at a trillion dollar scale is a good way to grease the skids to fiscal disaster.
When I was an undergraduate at UCLA I was sitting in my macro-economics course and noticed the girl next to me filling out a drop slip. It was for calculus 3B (maybe 3A) which was the “calculus for business folks”–i.e. the easier type of calculus. She saw me looking at her and said, “Its too hard.” I asked her, “Will it be easier next quarter?” which of course earned me a dirty look.
As the economists say, it’s all about the incentives. And right now, Congress has incentive to do nothing but rearrange the deck chairs. Look busy, folks.
And when will they have an incentive to do otherwise?
I don’t know, Steve. Probably when we have an incentive to give them one.
So never.
Steve,
When US government insolvency begins to affect average joe American, then things will change.
There is no major constituency pushing for cost cutting, just some blog writers. Pushing for cost cutting risks angering the Medicare crowd.
Those graphs look pretty consistent with what I see at work. Imaging and total joints are major money makers in my area. The newest scam, errr revenue enhancing strategy, is the total joint hospital. These are added on to existing surgicenters. That means that the surgicenter can charge hospital rates for what they do. The total joint “hospital” has no emergency and little in house care beyond nursing staff and physical therapy. If a patient gets sick, they send them to a real hospital. Lots of profit in this strategy. All legal. Just people acting like good capitalists making as much money as they can.
Steve
In Econ 101, dropping the price paid, reduces supply. Raising the price paid increases supply. If we were to drop the price paid, we would eat through our greater supply of MRI machines and other high and low technology and people would not replace them.
This is also known as eating your seed corn. It is generally considered a stupid thing to do. So why is health care an exception? Or is it an exception?
TMLutas,
The supply of healthcare is inelastic. You can have all the MRI machines in the world but they don’t do much good if there aren’t professionals to operate them and interpret the results.
Andy’s given part of the answer, TMLutas, but another part of the answer in the case of CAT scanners (of which I have personal knowledge) and, I presume, for MRI’s is that, at least in the United States, they are Veblen goods. The question is not why there are so many but why there are so few.
Really? Like how? Higher taxes? Higher inflation rates? Those affect the average Joe too, but in bad ways. There is no pretty and nice way out. There is only ugly and uglier. But our politicians are venal cowards. They are more worried about re-election than anything else. So lying is always a winning strategy. Very few countries have reformed health care successfully. So far it is Singapore and the Netherlands (AFAIK) and they are small countries with far more homogenous populations which may play a major role in the success of reform.
Uhhhmmm no. Demand is inelastic, but supply I don’t think is. If the government came in and artificially slashed all prices in half you really think all the MRI centers would stay open? That they’d pay the x-ray/MRI techs the same wages and employ the same number? That they’d keep just as many nurses, out-patient facilities and so forth?
You just contradicted yourself.
Frankly no health care reform is going to work without a change in the way health care is delivered. It’s an outdated system that locks in doctors and patients to a method neither are very happy with.
It is, I believe, the insurance industry that has spurred a segregation of care in the misguided hope it would lead to cost saving, but it’s had the opposite effect.
I’m talking about the political will of the American people. There very well may be nothing that can be done, but that won’t change the fact that the American people will demand that something be done. Now, the people are content to keep borrowing and kicking the can down the road.
Who knows, maybe they would, or maybe they would get bought out, or maybe a lot of things might happen. The advantage of a fee-for-service systems is that cost-shifting is pretty easy. Obviously one can come up with hypotheticals where supply would be affected, but I think for the most part in the real world supply is basically inelastic.
No, that was an example of how supply is inelastic on the up side. The limiting factor is the ability to get trained personnel and that’s not easy (as Dave has discussed before).
Lets see, yeah they’ll stay open even though costs are still the same, but revenues have been cut in half. That suggests massive profit margins, which I doubt, or a seriously dysfunctional market that needs a huge dose of competition.
Oh, sure in the immediate run supply is inelastic, but this is true of just about everything, so what. In the medium to longer run supply is going to be more elastic than supply.