Why Health Care Is So Expensive

Moneybox
A blog about business and economics.
Feb. 22 2013 8:35 AM

Steven Brill's Opus on Health Care

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Dutch football player Wesley Sneijder stands during a health control at a hospital in Istanbul on January 22, 2013.

Photo by STR/AFP/Getty Images

Steven Brill's cover story in Time on hospital pricing is quite brilliant, but also extremely long. If you want to seem well-informed this weekend without reading over 20,000 words, here's what you need to know.

The framing device, which is clever but wrong, says we spend too much time debating who should pay for U.S. health care and not enough time debating why the prices are so high.

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The analytic core of the article shows that when it comes to hospital prices, who pays determines how high the price is. When an individual patient comes through the door of a hospital for treatment, he or she is subjected to wild price gouging. Insane markups are posted on everything from acetaminophen, to advanced cancer drugs, to blankets, to routine procedures. Because these treatments are so profitable, internal systems within the hospital are geared toward prescribing lots of them. And even though most hospitals are organized as non-profits, most of them in fact turn large operating profits and their executives are well-paid.

In addition to providing insurance services, a key service that a proper health insurance company provides is bargaining with hospitals so you get screwed less. No insurer worth anything would actually pay the crazy-high rates hospitals charge to individuals. But in most markets, the hospitals have more bargaining leverage than the insurance companies, so there's still ample gouging. The best bargainer of all is Medicare, which is huge and can force hospitals to accept something much closer to marginal cost pricing, although even this is undermined in key areas (prescription drugs, for example) by interest group lobbying.

I can see two reasonable policy conclusions to draw from this, neither of which Brill embraces. One is that Medicare should cover everyone, just as Canadian Medicare does. Taxes would be higher, but overall health care spending would be much lower since universal Medicare could push the unit cost of services way down. The other would be to adopt all-payer rate setting rules—aka price controls—keeping the insurance market largely private, but simply pushing the prices down. Most European countries aren't single-payer, but do use price controls. Even Singapore, which is often touted by U.S. conservatives as a market-oriented forced-savings alternative to a universal health insurance system, relies heavily on price controls to keep costs down.

For reasons I do not understand after having read the conclusion twice, Brill rejects both of these ideas in favor of meaningless tinkering around the edges. He wants to alter medical malpractice law, tax hospital operating profits, and try to mandate extra price transparency. That's all fine, but it's odd. His article could not be more clear about this—health care prices are high in America because, by law, we typically allow them to be high. When foreigners force prices to be lower, they get lower prices. When Americans force prices to be lower (via Medicare), we get lower prices. If we want lower prices through new legislation, the way to get them is to write laws mandating that the prices be lowered.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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