Why Are Hospital Costs So High?

Holman Jenkins has a reaction piece to Steve Brill’s Time article on the high cost of healthcare. As you might expect, he disagrees with Mr. Brill’s underlying viewpoint:

Your time might be better spent reading Duke University’s Clark Havighurst in a brilliant 2002 article that describes the regulatory, legal and tax subsidies that deprive consumers of both the incentive and opportunity to demand value from medical providers. Americans end up with a “Hobson’s choice: either coverage for ‘Cadillac’ care or no health coverage at all.”

“The market failure most responsible for economic inefficiency in the health-care sector is not consumers’ ignorance about the quality of care,” Mr. Havighurst writes, “but rather their ignorance of the cost of care, which ensures that neither the choices they make in the marketplace nor the opinions they express in the political process reveal their true preferences.”

You might turn next to an equally fabulous 2001 article by Berkeley economist James C. Robinson, who shows how the “pernicious” doctrine that health care is different—that consumers must shut up, do as they’re told and be prepared to write a blank check—is used to “justify every inefficiency, idiosyncrasy, and interest-serving institution in the health care industry.”

Hospitals, insurers and other institutions involved in health care may battle over available dollars, but they also share an interest in increasing the nation’s resources being diverted into health care—which is exactly what happens when costs are hidden from those who pay them.

I think there are several prospective explanations for high hospitals costs and for the high cost of healthcare, generally. These include that physicians want to maintain their incomes at a certain level or increase them and change their behavior to accomplish those goals (“target income hypothesis”), there is uncertainty among physicians about the most effective course of treatment which results in more approaches being tried (“professional uncertainty hypothesis”), or the outcome one might expect when either or both of those factors are combined with a hierarchical bureaucracy.

9 comments… add one

  • jimbino

    I had to file a FOIA request to get the pricing for treatment by CPT code in Tesas. Everyone, including the gummint, and especially insurance companies and medical providers do everything they can to hide the pricing.

    Of course, when a third party pays almost all the bill, no patient gives a damn. Any person who pays for treatment should demand itemization by CPT code, just as Medicare, Medicaid and the insurance companies do.

    Try calling MD Anderson, for example, for pricing on a colostomy. You will find that a private patient is charged ten times what Medicare allows for the same. Disgraceful. One only hopes that the time has come to “run out of other people’s money,” as Maggie Thather would put it.

  • sam

    “The market failure most responsible for economic inefficiency in the health-care sector is not consumers’ ignorance about the quality of care,” Mr. Havighurst writes, “but rather their ignorance of the cost of care, which ensures that neither the choices they make in the marketplace nor the opinions they express in the political process reveal their true preferences.”

    But wasn’t that a large part of what Brill was saying in the article? The billing practices of medical service providers are so byzantine that consumers have to turn to professionals skilled in deciphering the arcana to unravel all that bullshit.

    I don’t know if you’ve read Brill’s article, Jimbino, but MD Anderson is held up as a example of the bullshit referred in the last paragraph.

  • steve

    ““The market failure most responsible for economic inefficiency in the health-care sector is not consumers’ ignorance about the quality of care,” Mr. Havighurst writes, “but rather their ignorance of the cost of care, which ensures that neither the choices they make in the marketplace nor the opinions they express in the political process reveal their true preferences.”

    Absolutely. By the time you have your 5th or 6th splenectomy you will have determined what kind of quality you should expect and what you are willing to pay. Bet he has a degree in journalism or something and no experience with health care. (Pause while he asks the Google.) Yup. It is bad enough when we get economists with no expertise about health care policy trying to write as though they are experts, but journalists are even worse. They write well, so their nonsense is more appealing to the uninformed.

    Mind you, there is no good reason why a journalist or economist cannot acquire information about health care policy or demographics or how things really work. Some do and write well on the topic. But, when you get people who don’t, Holman appears to fit this group, they do nothing but construct straw men or say things that are just puzzling since they make no sense thrown in with the obvious points on which we all agree.

    Steve

  • jan

    Most people have limited medical knowledge. This causes many to view doctors as Mini-Gods, in their expertise. Consequently, they go to physicians with their aches, pains, symptoms, and oftentimes mindlessly follow whatever their prescription may be. This is especially true if they’re not paying for procedures/services, and it’s free no matter what the diagnosis suggests undergoing. Then, absent tort reform, if the doctor doesn’t give them enough tests, an elongated or the best treatment (in their minds), they can then sue! IMO, it’s a perfect recipe for a chaotic, abused and expensive medical model to flourish and grow.

    More patient education, offering incentives for healthy lifestyles and practicing preventive medicine, involving consumers in cost awareness and care options, having states innovate and customize HC services to their own demographics, including having HSAs if at all applicable — just applying common sense, doctor/patient team work, actively involving the consumer in their health care, and decreasing frivolous lawsuits — would be helpful steps to reducing medical costs, as well as dispensing better HC to more people.

  • steve

    “, having states innovate and customize HC services to their own demographics, ”

    Not to pick on you, but this is one of our problems. In principle I support using our states as labs to look for ways to save costs. In reality, the states are the ones that generate the mandates that raise the costs of insurance. I had this out with Avik Roy a few years ago. He conceded that when it comes to insurance companies selling across state lines, a frequent conservative wish, they can already do this. What is really meant by this, is wanting to eliminate the state mandates. It is also interesting if look at this state by state. You will see that there is no pattern as to which state has the most, least or oddest mandates.

    Steve

  • michael reynolds

    By the time you have your 5th or 6th splenectomy you will have determined what kind of quality you should expect and what you are willing to pay.

    Interesting point. I’m a very informed consumer of dental care. But even there I still don’t have an easy way to compare costs from one dentist to the next. But I’ll never be informed on either the quality or cost of emergency room care for stabbing myself in the thumb. (Hopefully just the one time on that.)

    Meanwhile I’m online booking a flight and hotel in LA and all my choices are laid out in amazing detail. When I think about in in those terms, it’s easy to see the problem. I don’t know what a hospital visit will cost, or whether it’s worth driving another 20 minutes to a different hospital. And why should I bust my ass when it’s all on Blue Cross anyway?

    But shouldn’t Blue Cross care? Shouldn’t they be able to negotiate to get the low Medicare prices?

  • steve

    “But shouldn’t Blue Cross care? Shouldn’t they be able to negotiate to get the low Medicare prices?”

    They don’t. I have emailed off to, and had discussions about this with many economists. (Amazing how many big name guys will answer if you just send them a question and ask politely.) The private insurers pay, on average, about 20% more than Medicare, but the beta is huge, sometimes up to 300% more. Some people think Medicare acts as a price floor. I dont think that quite fits. If the Blues need to pay more than Medicare to make sure there pts get seen, why not pay just 5% more? My POV on this is that private insurance actually drives our higher prices. Medicare needs to keep moving up its prices to keep payments reasonably close to private fees, or docs really will stop seeing Medicare pts (this is mostly overblown right now).

    SO why do they charge more and not push for lower fees? I f I really knew the answer I would have a Nobel or something (at least an Ignobel), but I think their incentives just dont line up for much cost cutting. First, they are able to pass on costs. As much as we talk about costs being too high, no one cares enough to do anything about it. Insurance execs make more if their companies are larger. Next, and there is some good literature on this, insurance companies lose market share if they try to save money by not paying for care that does not work, or care that doesn’t work any better than older, cheaper treatments, they risk getting bad press and losing market share. They pretty much cant, or won’t, cut non-effective care w/o political cover.

    Steve

  • michael reynolds

    Steve:

    I can see the point about not wanting to lose customers over denial of dubious practices. But BC should still not be paying twice as much for an MRI. I wonder if it’s as simple as the fact that the more cash flows through BC the more sticks to their fingers. In any event, it certainly does make private health insurance look like a bad idea.

  • If the Blues need to pay more than Medicare to make sure there pts get seen, why not pay just 5% more?

    Because for practical purposes the insurance companies aren’t acting as insurance companies in the sense that they aren’t bearing risk. Most large and medium plans are self-insuring. That means that the insurance company is only acting as a processor and bears no risk but is perversely compensated based on volume, i.e. they want prices to be high. For small and individual plans you might think the insurance companies are bearing risk but they know, with a confidence born of experience, that any rate they ask will be approved and, consequently, since they receive a percentage of the principle sum as compensation, they want prices to go up for those, too.

    Much of that is just a more technical way of saying what Michael said: the more money flows through the system, the more sticks to their fingers.

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