Diagnosing the U.S. Health Care System

Few get it right

Richard G. Frank and Sherry A. Glied write,

the main driver of cost growth in the general health care sector has been technological change, particularly through the introduction of capital-intensive devices and procedures (Chernew and Newhouse 2011)

Unfortunately, the Chernew and Newhouse paper is a chapter in an Elsevier book (), so I don’t have it. But five years earlier, in Crisis of Abundance, I provided the same diagnosis. I also pointed out that health care has made increasing use of human capital, in the form of specialists.

In the WSJ, Chris Pope writes,

Between 1997 and 2011, 85% of the increase in real per capita Medicare spending was on newly created procedure codes marking additional medical services. Physician service payments for cardiovascular procedures increased from $1.3 billion in 2000 to $3 billion in 2019, $2.3 billion of which was on service codes which didn’t exist in 2000. Spending on physician-administered drugs surged from $3.4 billion in 2000 to $17.1 billion in 2019, $14.9 billion of which was on codes that didn’t exist at the turn of the century.

Some of this is gaming the system by coding a minor tweak as an entirely new treatment. But the point that today’s health care uses new and more costly procedures holds.

If this diagnosis is correct, why does it receive so little attention? I suspect that people prefer a diagnosis that blames “our free-market health care system” in order to promote a government fix.

For example, a famous article published in 2003 by Uwe Reinhardt and others was titled “It’s the Prices, Stupid.” It claimed that since health outcomes in the U.S. (as measured by longevity) are no better than in other countries and we spend much more per person on health care, that providers must be over-charging. But the authors made no attempt to separate out the costs of new procedures. They simply look at the total bill for health care services and imply that the entire increase is due to price changes.

But price changes in fact account for very little of the increase in health care spending. Even at today’s prices, we could easily afford the medical procedures that were available forty or fifty years ago.

“It’s the Prices, Stupid” was false when the article was written, it is downright silly today. Everyone I know has difficulty finding a primary-care doctor these days. Nurses are also in short supply. When there are shortages, that tells you that compensation is too low, not too high. (Yes, shortages may in part reflect over-regulation of the health care industry, but I can assure you that is not what the authors of the article had in mind.)

Reinhardt and others proposed increasing the power of insurance companies to negotiate down prices charged by health care providers. This idea failed to take into account the response of the health care industry. There has been consolidation, with the formation of large hospital conglomerates and the disappearance of small practices. There are many reasons for this consolidation (including compliance costs with “electronic medical records” and other mandates), but it has served to blunt the negotiating power of the both private and government insurance.

Another target of health care policy interventionists is insurance company overhead. But that overhead reflects other problems. One problem is that health care providers put effort into “gaming” the compensation system. These efforts range from “up-coding” services to outright fraud. Doctors and patients hate it when insurance companies dispute claims. But if the insurance companies did not put so much effort into investigating claims, health care spending would be even higher.

More fundamentally, health insurance is broken because it is not really insurance. Real insurance (think of fire insurance) pays out claims in the case of rare, unusually costly events. But with health insurance, patients file claims for every encounter with the health care system, whether the expense is large or small. There are ways to reconceive health insurance so that claims are paid only in the case of catastrophic illness or injury, but that would require the public to change its idea of what constitutes “good” health insurance. Right now, the more nickel-and-dime coverage (eyeglasses, routine dental exams), the more consumers and health care providers like it.

You can come up with plenty of problems that would emerge in a free-market health care system in theory. In practice, government involvement does not solve these problems. As usual, government ends up subsidizing demand and restricting supply.

The correct diagnosis of the problem of excessive health care spending is that we undergo too many medical procedures with high costs and low benefits. When I wrote my book, the practice of routine colonoscopy screening of otherwise healthy people starting at age 50 (a practice which was unheard of in other countries) was a typical example, with cost per life saved exceeding a million dollars.

I would argue that the main causes of poor health outcomes in the United States are obesity, substance abuse*, and mental illness. These are all notoriously difficult to treat. But if I were tasked with improving health outcomes in this country, I would rather err on the side of throwing more money at these problems than at the rest of the health care system.

*also implicated in automobile accidents and incidents of violence

This essay is part of a series on human interdependence.