Why is Medical Care So Expensive?

by Jay Johansen

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The cost of medical care in America continues to rise faster than inflation. Whether it is “too much” is a subjective question that is impossible to answer, but it certainly seems high.

Why is it so expensive?

Hard-to-avoid reasons

There are some factors that are inherent in the nature of medical care. It would be difficult to avoid increased costs caused by these things. Such as:

People who need urgent medical care are not in a position to shop around and negotiate

When you buy a new car, you are likely to check out many possible options. You may do some research on the Internet or at the library. You may ask friends for their experiences. You test drive several cars. You may well take weeks or months to gather the facts and make a decision.

You are not likely to do any of that when you have a heart attack or are injured in an accident. The ambulance rushes you to the nearest hospital and that’s it.

People who need medical care don't want the bargain basement

With most products, most people will settle for "good enough". You might buy a used car rather than a new car because you can get it for a fraction of the price. Or if you buy the new car, you don't buy the top of the line with all the options, but the model that has a balance between price and features or quality. You probably often buy a product that you know is lower quality because it's cheap and you don't care very much, or are willing to take a chance.

But with medical care, low quality does not mean a minor inconvenience. It may mean death.

Medical care requires the services of highly skilled professionals

In many fields, advancing technology results in human labor being multiplied or even replaced by machines. If a machine in a factory can allow one man to produce as much as ten men could produce with hand tools, the price can fall by as much as 90%. Machines can get cheaper and cheaper in comparison to the cost of human labor, but human labor cannot get cheaper in comparison to human labor, by definition.

Some things still require skilled human labor, and technology has done little to reduce the cost. Things like lawyers … and doctors. Maybe someday we'll have robot doctors or some such that will allow technology to replace human labor, but we don't have that today.

Easy-to-avoid reasons

But there are other reasons that we could easily avoid by changing our laws and business practices. Such as:

Malpractice suits drain medical resources and force doctors to use inferior treatment

We are all sympathetic to someone who suffers because of a doctor's mistake. Few would say that a doctor should not be expected to offer some sort of "guarantee" of his work, that if his mistake causes the patient unnecessary suffering, that the doctor should make good in some way. But somehow we have gone from there to saying that if a doctor makes a mistake, his practice should be destroyed and he should be bankrupted. Meanwhile, the lawyer who brings the suit destroying the doctor should be made rich off the doctor's mistake.

Malpractice insurance is a major expense for doctors in America today. Not only is this a direct drain on medical resources, but it forces doctors to practice "defensive medicine". They order expensive tests that they know will almost certainly turn up negative, so that if anything goes wrong they can argue in court that they did everything possible.

Furthermore, they avoid untried or experimental procedures, even if the patient has no other hope, because if it doesn't work out, the patient could sue. If the doctor does the same thing that all the other doctors do and the patient dies, he can defend himself in court that he followed standard practice. If he tries something experimental and the patient has anything less than a full recovery, a lawyer will be prepared to argue that if he had done something different the patient might have fared better.

Indeed, doctors are often forced to provide treatment they know is less than optimal, because a court will demand it. It doesn't matter if all the medical journals and decades of practice say that treatment plan A is better than treatment plan B. If a lawyer can convince a jury, based on junk science and emotional appeals, that B would have been better, a precedent is established, and doctors are forced to do B.

Cost of medical care is rarely advertised and billing is often confusing

For most products, you can easily find the price before you buy. You can comparison shop among multiple sellers.

Medical care is one of the very few exceptions to this. You are routinely expected to sign a contract committing to pay for medical services without knowing the price.

Yes, it is true that what is required of the doctor may be unpredictable. It may take extensive effort before he is even sure what the patient's illness is. It is not like selling a toaster, where the store knows in advance exactly what their costs are. But this is hardly a problem unique to doctors. Auto mechanics face a very similar problem. Most mechanics I've visited solve this problem by charging a "diagnostic fee" to figure out what the problem is, and then quoting a price to fix the problem that includes an allowance for minor variations. If when they get in there they discover major additional problems, then they back up and say sorry, there's a bigger problem, this will cost more than we originally quoted. In either case, they tell the customer in advance what the cost will be before they ask for a commitment and start work. I see no reason why doctors couldn't do the same.

Even if some doctors did start publishing a price list, medical billing is fragmented. I recently had some tests done at a hospital. I got a bill from the hospital for the use of their facilities, another from the technician who performed the test, another from the doctor who evaluated the test results. etc.

I don't know any other business that works like this. When you buy a car, you don't get one bill from the dealer, another from the maker of the engine, another from the maker of the body, another from the guy who filled the gas tank, etc. You get a single bill. It's the responsibility of the manufacturer and the dealer to bring all of their costs together and present a single price to the customer.

This makes it difficult to shop by price. The customer/patient would have to find out all the different providers and suppliers involved and add up all their prices. Then he would have to go to the next possible combination of providers and add up their prices, etc. The problem of comparison shopping is multiplied.

With most products, the "end provider" takes responsibility for the costs of all other suppliers and takes control of them. For example, whether a car maker produces brakes himself or buys them from an outside supplier, the price of brakes is included in the price of the car. If the car maker buys them from an outside supplier and that supplier charges too much, the car maker has every incentive to find a more reasonable supplier or negotiate a better price.

Most Americans pay for their medical care indirectly, usually through multiple steps

With most products, the customer pays for it directly with his own money. The customer has an incentive to find an economical price. Of course you don't always buy the cheapest product. You seek a balance between price and quality. When all the choices seem equivalent, you buy the cheapest. You may decide to buy the most expensive when cheaper ones aren't good enough. Or you may decide not to buy at all if the price is too high.

Few Americans pay for their own medical care directly. Most medical care is paid for by either an insurance company or the government.

In the case of insurance, the customer/patient pays indirectly, through insurance premiums. Or the insurance may be paid for by the patient's employer. The patient is still paying for it, of course, in the form of a lower salary. As far as the employer is concerned, the cost of insurance is part of the cost of labor, it doesn't much matter to the employer whether he pays $1 in higher wages or $1 in higher benefits.

In the case of government-paid care, the cost is paid by taxes, which are even more indirect.

This reduces or eliminates the customer/patient's incentive to control costs. When someone else is paying the bill, who cares how much it is? If you don't have to pay for it, you have no reason to balance cost versus benefit, or even to find the cheapest supplier of the same service.

Suppose we bought cars like this. Whenever you decided you needed a new car, you would just go to a dealer and pick one up, and your auto insurance or the government would pay for it. Would you shop around for the best price? Probably not: it makes no difference to you. Would you get the most economical car that meets your needs? Again, probably not. You'd likely get a much fancier and more expensive car than you would get if you had to pay for it directly yourself. You might even take a second car so you can have, say, a sedan for when you are carrying passengers and a pickup for when you are hauling some large object. Hey, you might even get a second car as a "backup", just in case. Who cares if you're not paying for it?

I'm not saying that in the present indirect-payment environment that large numbers of people are getting totally frivolous and unnecessary care. What I am saying is that some small number of people are getting frivolous and unnecessary care, and all the rest are paying for it. And a larger number of people are getting debatable care, care that you couldn't objectively prove is wasteful but that they would never have gotten if they had to pay for it themselves.

This is probably the biggest factor in inflated medical costs.


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July 13, 2010.

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