Health Care Is Expensive Because the Prices Are High

One of the most striking facts about health care economics in the United States is that our health care costs are so high largely because we pay such high prices. That sounds almost tautological at first, but it’s genuinely not. And you can see it in a variety of ways. One is the comparison of Medicare to private health insurance. Medicare is a very expensive government program, but it’s actually cheaper than private health insurance. Liberals sometimes point to administrative efficiencies and lack of advertising and executive compensation as the reason for this, but the main reason is simply that the prices are lower. Medicare is a bulk purchaser of health care services, and offers providers an offer they can’t refuse—perform medicine relatively cheaply, or get locked out of the Medicare client base.

Similarly, if you compare U.S. health care spending to health care spending in foreign countries you see that again the main issue is just paying higher prices for the same services. It’s not that Americans are unusually sick or that Americans use an unusually large amount of health care, it’s that foreign countries engage in more nationwide price-setting to ensure low per unit prices for health care services. Sarah Kliff has a post making the same point in a new super-clever way. She’s got this chart from the National Center for Health Care Reform where they looked just at America’s unionized auto workers. That’s a large and geographically dispersed population and it lets you compare high-cost regions to low-cost regions. And this is what you get:

Demographic factors are the largest source of variation: Sicker people are costlier to care for and differences in age and gender matter. But if you look at the rest, differential price per unit of health care services is a much bigger deal than differences in the quantity of services rendered. Which is all just to say that if we actually want health care to get cheaper there’s a very simple solution staring us in the face: lower prices. I’m not sure this is something America really does want as a society. But certainly politicians and pundits talk an awful lot about how they want this. And yet nobody actually seems to want to do what’s done elsewhere and say that in exchange for the massive subsidies the health care sector receives it needs to accept price controls.