Health Care Spending: It’s The High Prices

The American political system is oddly resistant to this conclusion, but via Uwe Reinhardt here’s another study, this time from Miriam Laugesen and Sherry Glied, showing that America’s health care spending is so high largely because we pay such high per unit costs:

Higher health care prices in the United States are a crucial reason that the nation’s health spending is so much higher than that of other countries. Our study compared physicians’ fees paid by public and private payers for primary care office visits and hip replacements in Australia, Canada, France, Germany, the United Kingdom and the United States. We also compared physicians’ incomes net of practice expenses, differences in financing the cost of medical education and the relative contribution of payments per physician and of physician supply in the countries’ national spending on physician services.

Public and private payers paid somewhat higher fees to United States primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians’ counterparts in other countries. U.S. primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services or tuition expenses, were the main drivers of higher U.S. spending, particularly in orthopedics.

It used to be the case that conservatives were generally aware of this. They would warn that socialized medicine would lead to price controls, and that low prices would lead to rationing and low profits in the health care sector. Lower profits would, in turn, reduce investment in health care R&D. So the case for the American system was supposed to be precisely that it kept prices, and thus overall spending, high.

Things changed, however, when we stopped talking about progressives’ dreams of proving health care to the uninsured and started talking about Paul Ryan’s dream of repealing Medicare in order to preserve budget headroom for low tax rates on high-income people. Rather than admit that this will simply shift costs to patients, conservatives have started making utopian assumptions about this step magically reducing health care costs. But it won’t. Medicare is expensive because it pays relatively high prices compared to what public programs in other countries pay, but it pays lower prices than private plans in the United States. If we replace it with private plans, both prices and overall spending will go up. If that’s what you want to have happen because you think increasing overall health spending will attract more R&D capital to the health care sector, that’s fine. But if what you want is to restrain health care spending you need more state involvement and lower prices.