The Mises View: “How Do We Stop Rising Healthcare Costs?” | Peter G. Klein


Many people today are concerned about
the rising cost of health care, particularly in the United States. This
indeed is one of the prime motivations for President Obama’s health care reform proposals, so-called
Obamacare plan. There’s been quite a lot of backlash
politically and otherwise against Obamacare but most people agree that something is
wrong with the health care system, particularly in the United States, and
that something needs to be done in particular, to get prices down. One
of the problems with health care pricing in the United States, is that the prices
are not at all transparent. When most of us go to the doctor or go
to the hospital, we’re relatively unaware of how
much were actually paying for the various procedures that we get. Mainly we ourselves do not pay, we pay a
little upfront cost and then our health insurance provider
pays the rest. Indeed there’s a study just out in the
last couple days, by a group in Colorado called the Center for Improving Value in
Health Care pointing out how much variety in
prices there can be for single procedure. They
noted for example, that in Colorado- excuse me in Denver alone a colonoscopy,
which is a very standard procedure, can range in price from $400 to
$2800 dollars. Now, when we shop for most goods and
services, like restaurants or automobiles or vacations, we can go online and compare prices and
get customer reviews and really do some comparison shopping.
With medical services we typically can’t do that, there’s
simply no way to find out how much things cost. If we had more transparency in prices, this Colorado group argues and I agree,
there will be more pressure on health care providers to compete on
price, to keep prices down, to be more efficient.
Most health care providers go a long way to avoid disclosing how
much things cost. One reason is there are huge and highly
variable mark-ups on very standard procedures. I had dinner with a couple of doctors a
few weeks ago and they reported how a simple injection that can cost less than ten dollars to
the doctor, can be priced to the buyer anywhere from
$200 to $400 dollars depending on who’s paying. The problem
here has to do with this so-called
third-party payer system. Most Americans don’t pay for health care
expenses out-of-pocket. Their insurance company pays or if they
have medicare or medicaid, the government pays. This results in
consumers having little incentive to learn about prices and to compare
prices among providers. Why do we have a third party payer
system? Well, even leaving aside medicare and
medicaid, most americans have insurance provided about their employer
and that’s no coincidence. It’s because the US tax code considers employer-provided health benefits to
be an untaxed benefit. If I pay for health care services or health
insurance premiums out of my own pocket, I have to pay income tax on those. So, it’s
this peculiarity of the tax code that leads to the dominance of these
third-party payers which means that consumers are not
price-sensitive and all of this contributes to the high cost of medical
care in the US. In an earlier Mises View I argued that health care goods and services were
really not that different from other goods and
services and that the free market could provide effective and affordable health
care just as it provides automobiles and shoes
and housing and other goods and services. The key is
to let the market do what it does and to avoid government intervention
that leads to the third-party payer system and other
mechanisms that prevent competition and keep prices high and quality low. We can have an effective free-market in health care services if the
government will just allow it to work.

12 Replies to “The Mises View: “How Do We Stop Rising Healthcare Costs?” | Peter G. Klein”

  1. PRP injections cost the hospital: $30 per kit. 20 minutes of physician time. 30 minutes of lab tech or nurse time. 1 hour of facility usage. 
    Price paid by patient for low back pain, knee pain, joint erosion: $1000-2000. 
    That's one of the best markups in the world and the supply is protected by the govt. 

  2. Doctor's cut costs by cutting back on quality and safety. Patients are not able to choose the best doctor based on cost alone .Lower cost may simply mean lower quality. We're dealing with human life here. There are many problems with free-market medicine. One of the biggest is unnecessary drugs and procedures.

  3. Of course anther factor that raises costs in medicine
    is the heavy regulations and the costs that come with those regulations on the market. Just look at what it costs to get approved by the FDA and than those costs are passed on to the people who need the treatments, or in this case the insurance
    companies. Who are also under heavy regulation from the government and again those costs also get put on the public. Free Market should be allowed to work instead of being handicapped by the government who has never successfully managed anything.

  4. As someone who works inside the healthcare system, I get to see first hand how the 3rd party payment system distorts everyone's view of how healthcare is to be administered.  One aspect that is not commonly discussed is the deleterious impact this system has on research.  Instead of the patient deciding whether to participate in a study, it is often ultimately up to their Insurer (though this varies by locality). 

  5. There is a cost that is very visible. In fact it is the reason why socialized medicine doesn't get completely out of hand. Going to the doctor is not pleasant and the more expensive the procedure the more unpleasant it is. This is not like socialized food for example. That a trip to the doctor can be made even more unpleasant is one of two mechanisms the monopoly provider uses to limit over use. The other rationing technique is to form a queue that does more than buffer slack times. It discourages people from getting in the line.

  6. I still don't get why getting insurance through employers is what causes prices to rise. The argument is that since the customer doesn't "shop around" for a plan, there is no competition. However, why do people assume there is no "shopping around" just because you're getting your plan through an employer? Doesn't the employer "shop around" when he picks your plan? 

  7. Here is why you are wrong:
    1. Medical people and institutions do not act like retailers or manufacturers. They do not compete with each other on price or value, and they certainly never advertise prices. Thus, It is impossible for a person to shop around for the best price on any given procedure. This makes sense in part because health care is one place where people inherently understand that cheaper is probably not better so no medical person or institution would dare compete on price.
    2. People establish personal relationships with their doctors and do not switch doctors because one is offering a sale on flu shots or a discount on appendectomies. There are no President's Day sales on throat examinations or colonoscopies. No one in their right mind would bleed to death while searching for the cheapest emergency care provider.
    3. The current situation is third party, not because it was initially set up that way by government, but because it was one more incentive that a company could offer to get the best possible employees. Each company makes an employee benefit package according to what potential employees can demand of it. Those job applicants with the least education and skills end up with little or no health insurance provided, while those with degrees from Harvard or those who join a powerful union can expect far better insurance.
    4. Many unemployed or self-employed people do have to get their own health insurance because they know they cannot pay full price immediately for emergencies, and that is the only time they are price conscious, usually getting the cheapest insurance they can and hoping they never get really sick. If they do get really sick, they are likely to become a drain on the rest of society as someone picks up the slack with higher medical costs.

  8. Third party payers are going to be a factor no matter what.

    Only a very small fraction of the population has the resources to absorb the variation in medical costs inherent in life, without resorting to an insurance company. I have NO idea how many medical costs I might need in the future. I have really few options but to be insured, since I don't have the funds to self-insure for low probability scenarios.

    Price transparency is a great thing, but it isn't a panacea, and due to the necessity of insurance, regardless of government tax incentives, price signals will still not be reaching consumers.

  9. So we're screwed. Nothing we can do about it. My plan premium jumped another $50 per month. Every year it increases and my benefits go down. I'm gonna start selling my blood and collecting cans to get back the money I'm losing. This sucks.

  10. How about when you go to the emergency room and you need immediate healthcare treatment? In such a scenario, no one has the time to look for the cheapest doctor and the hospital can still charge you an exorbitant fee. Why not just tackle this problem directly if you want to do anything about it?
    As for the video's second point, this doesn't mean that if there was no longer income tax on paying out of pocket for health insurance that healthcare prices would go down. Also, people would still have incentive to use employer health insurance because it would still be cheaper.

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