April 1, 2013

Health Care Cost Discrepancies

In his article, Why is American Health Care So Ridiculously Expensive?, journalist Derek Thompson attempts to present explanations for why, in a 2012 report by the International Federation of Health Plans comparing the average price of 21 different medical procedures in 25 countries, the United States  ranked most expensive in all 21 categories, often twice or even three times more expensive than the runner-up. Thompson claims that the two primary reasons for the drastic difference in cost between American healthcare and the rest of the world stems from two primary sources: the fact that the government does not manage the prices charged for medical procedures, and  the claim that "the complications created by our for-profit system adds tremendous costs." However, after thinking through his claims and applying basic economic principles, I have arrived at the conclusion that Thompson has little grasp on the true forces at work in the healthcare systems of both America and the rest of the world.

                Let us begin by looking at Thompson's first claim. In his article, Thompson writes, " the U.S. is unique in our reliance on for-profit insurance companies to pay for both essential and elective care. Twenty cents from every $1 goes, not to health care, but to 'marketing, underwriting, administration, and profit'," and goes on to conclude that "In a system where government doesn't negotiate prices down, prices will be higher." Both of these points show a complete lack of understanding of basic economic principles. The result of having multiple privately-owned insurance companies competing is that fees paid by American consumers for their insurance policies will be bid down in an attempt to undercut competition.

                Even more telling is the fact that the author has seemed to reverse the cause-and-effect of medical insurance cost of medical procedures: an increase in the cost of medical procedures would logically lead to an increase in the cost of insurance premiums, not the other way around. As to the question government management, while it is true that the governments of many other countries have succeeded in using force to keep the costs of medical procedures down, Thompson reluctantly admits the inevitable result of such intervention; namely that in those countries there are significant shortages in medical care and marked decrease in medical innovation compared to the United States.
                Thompson's second claim, that "the absurd complexity of U.S. health care creates its own costs," reasoning that "All these systems require another inefficiency -- the existence of compilers, middlemen who compile the bills doctors submit and shuttle them thru the payment system," once again make a faulty connection. The hiring of these "compilers" would result in increased insurance premiums, not in increased prices for the procedures themselves. As Thompson clearly states, the increase in cost comes purely from the increased difficulty in processing the procedure's bills, not from an increase in the cost of the procedure itself.

                So then, what could serve as an explanation for the still quite real price discrepancy between the price of American healthcare  services and those offered by other countries? I believe the key lies, as stated above, in the use of force. Out of all of the countries surveyed for the report, only the United States eschews  the use of government force to determine the price of medical procedures. Therefore, the prices offered in America are much more accurate representations of the true cost of the given procedures then any price quoted elsewhere. And as a result, "American health care is the world's envy in some categories, especially in cancer care, wait times, and access to new technologies" while patients in other countries have to wait months or even years to receive treatment. Who is truly better off: the cancer patient that has to pay more, but can get medical treatment immediately, or the cancer patient who pays less, but has to wait years to begin treatment?

Article: http://www.theatlantic.com/business/archive/2013/03/why-is-american-health-care-so-ridiculously-expensive/274425/#comments

No comments: