Health Care Is Expensive Because America Pays High Prices For Health Care Services

Ezra Klein posted a super-long chart making this point yesterday, but it really can’t be said often enough. The overwhelming reason that health care is so expensive in the United States is that Americans pay high prices for health care services.

That sounds banal or even obvious, but it’s not banal and it keeps getting overlooked. But as an example, Medicare has lower reimbursement rates than do private insurance plans. Any given insurance plan would obviously be glad to reduce its reimbursement rates, but it can’t because providers would stop seeing the plan’s patients if they cut down to Medicare levels. But private insurance plans invariably benefit from federal tax subsidies. Congress could pass a law saying that insurers who pay higher than Medicare’s rates are ineligible for the subsidy. Payments would tumble and competition would reduce premiums. Alternatively, we could rescind the tax subsidy for private health insurance, institute a Value Added Tax, and create a Universal Medicare system. Either way, some providers would drop out but the vast majority would simply be forced to swallow lower payments.

Even more clearly, we could impose price controls on pharmaceuticals or reduce patent lengths.

Now the concern with any of these ideas would naturally — and to some extent rightly — be that if you impose tight price controls, quality and availability will suffer. Lower pharma profits means less pharma R&D.; Stingier hospital payments means fewer beds. Lower pay for doctors might mean lower quality doctors. Those aren’t crazy worries. Arguably the rest of the world gets by free-riding on American generosity. We provide the windfall profits that drive innovation and they offer payments much closer to marginal costs and save money. But whatever you make of this it’s not like there’s some magical pixie dust in the air in foreign countries, they’re spending less because they’re spending less.