Ask the grumpies: Why is healthcare getting more expensive in the US?

Sandy L asks:

What has changed with healthcare that has made costs spiral out of control in the US? Why was healthcare more affordable just a decade ago? Two decades ago it was even cheaper. I am just glad I had my kids then.

Two things are the primary drivers of healthcare cost increases in the US:  1.  more expensive technology and 2.  as people become richer, they demand more/better healthcare.

An unsolved mystery (though top health economists are working on it) is why health technology, unlike other technologies, only seems to be in the “more expensive” direction and not in the “cost-saving” direction.  There are a lot of theories out there but we haven’t really nailed it down, nor do we really know how to change incentives so that healthcare innovations include price-drops instead of just price increases.

There are a lot of other reasons healthcare costs more in the US than in other countries, but you asked about growth, not the level differences.  Still, the fact that our insurance systems are so messed up (leading to lots of red tape, repeated tests, etc.) and the fact that the US is subsidizing innovation for the rest of the world because other countries have price controls on drugs and the US doesn’t are also main contributors to the fact that healthcare costs a lot more in the US than other countries.  We could solve the former with a single-payer system, and the latter would have to be solved either by directly investing in innovation or bargaining with other countries to loosen their price controls on new drugs.  These two items aren’t really getting worse over time though– they just contribute to the overall level differences.  (Malpractice is often brought up by conservatives, and it is a small contributor, but completely getting rid of the problems that malpractice litigation induces if we knew how to do that which we don’t just wouldn’t shave that much cost off.  That’s why policy makers haven’t been focusing on it even though politically there would theoretically be bipartisan support for reform.  There are bigger gains to problems that are easier to solve from an economic standpoint, if only the Republicans cared about you know, economics and efficiency and so on.)


27 Responses to “Ask the grumpies: Why is healthcare getting more expensive in the US?”

  1. Solitary Diner Says:

    I’m certainly not a healthcare economist, as a front-line healthcare worker I suspect that the litigious culture/malpractice suits drive up healthcare costs much more than they appear to. There is of course the direct cost of malpractice insurance, but in addition, physicians who are worried about being sued will inevitably order more tests than are needed. Why order just an ultrasound when a CT scan and MRI might show something that the ultrasound missed? This not only drives costs up directly via the cost of increased testing, but also indirectly via the cost of identifying the things that are found incidentally on increased testing. A small adrenal mass found incidentally on the unnecessary CT scan can lead to an Endocrinology referral and more testing and maybe finding something else that needs to be investigated….etc…

    Also, the expense of drugs in the US is due only partly to the high cost of drug development. Advertising costs are also a huge portion of the cost of drugs ( Drug costs could be driven down substantially, and physicians would probably make better prescribing choices, if governments would put restrictions on drug advertising.

    • Solitary Diner Says:

      *My first line should have read “but as a front-line healthcare worker”.

    • nicoleandmaggie Says:

      The research on malpractice takes general equilibrium effects into account. Economists pay attention to that stuff. It’s the kind of thing that economists have wished was a magic bullet, but the empirics just don’t support it even with the most generous assumptions. It’s one of the few things we’re pretty sure about in terms of bounding.

      • Solitary Diner Says:

        Interesting, although I’m obviously surprised!

      • nicoleandmaggie Says:

        If you watch any talk about healthcare costs on youtube (or in person) that has a Q/A section, there is always 100% of the time an MD in the audience who asks about malpractice reform. It’s not nothing, but the bang for the buck (so to speak) isn’t as big as we would hope.

  2. old and worried Says:

    Read Elizabeth Rosenthal’s An American Sickness. Go to your local library and get it there. First part of book really looks at what happened. In second she talks about how to change course but she clearly did not expect the Nov 16 election and the second part is therefore much weaker. The first part is very clarifying. Also depressing. Not allowing drug advertising would help. Also letting the government negotiate drug prices. Also admitting that R&D tax breaks make the US taxpayer a part owner of R&D drugs and therefore entitled to lower prices. Also…….. taxing the greed out of medical practices, and exposing the ‘charitable’ claims of hospitals and taking ‘religious beliefs’ out of hospital and medical care and ……… 45&GOP control.

  3. Linda Says:

    The observation about the health technology going only in the “more expensive” direction intrigues me. When I think of technological innovation, it almost always is “more expensive” than the technology it is invented to replace. But all I can think of are consumer goods like electric vehicles, home solar systems, appliances, etc. Is the “cost-saving” tech in industry? It seems like even “cost-saving” tech has an up-front price that is usually higher than staying with the “old” machinery, so what am I missing?

    When one benefits from medical technical innovation it seems totally worth it, which may be why it is so hard to keep costs lower, too. People want better solutions to their health problems than their parents and grandparents had. I’m getting a new stent implanted in my eye in a couple weeks. It was just FDA approved last fall, and from what the surgeon told me and I’ve seen in the product information it will be better for me than the older tech because it will be a shorter surgery, a faster recovery, and less tissue trauma. Even when told I may have to pay for it out of pocket and wait for reimbursement later I didn’t hesitate to book that surgery. Because when given a choice, of course I want those benefits! Of course I want to recover faster. Of course I want to preserve tissue that will need another procedure like this in roughly 10 years.

    • nicoleandmaggie Says:

      Home solar systems have come down in price quite a bit and continue to come down. Electric vehicles have come down in price and are actually affordable now. Appliances have come down in price. For all of these you get more and better than you would have for the same real dollar amount had you bought 30 years ago. And obviously with computers, you can easily see that the technology has gotten both better and cheaper as time goes on. With medical technology it gets better but not cheaper. For a lot of medical stuff, as soon as it goes off patent it’s abandoned and replaced with a slightly better but still under patent drug and doctors stop prescribing the nearly identical now-generic.

      Another big thing is that systems haven’t improved to make medical technology cheaper like they have for other goods– think how Walmart and Amazon have reduced shipping and storage costs.

      I mean, I can’t complain since my DH is part of the problem. But there really aren’t any incentives to make more cost-efficient medical technology. Just better technology.

      • Linda Says:

        “…you get more and better than you would have for the same real dollar amount had you bought 30 years ago.” Ah, this is the part I wasn’t thinking of. I was just thinking that a lot big ticket consumer tech still seems too expensive and out of reach for most people.

        Is the way the patent system works partly to blame? I guess those are the types of things that can’t be nailed down yet.

      • nicoleandmaggie Says:

        Everything has patents. But in medicine things don’t compete along price dimensions as much. Just quality. So older tech is replaced with better more expensive tech and not better cheaper tech. We’re not 100% sure why not. (I mean, some of it is third party payer stuff, some of it is doctor as expert stuff, but…) The markets just don’t work like regular competitive markets.

      • gasstationwithoutpumps Says:

        A few things have gotten cheaper over the years (mainly electronics). Other things have gotten better at the same price (after adjusting for inflation), like cars. Still others have remained similarly priced, but people have opted for more expensive choices, like bicycles. I don’t think that basic health care in the US has gotten that much more expensive for the same level of care, but the standards of care have gone up enormously.

      • Rosa Says:

        I would bet bikes haven’t gotten more expensive on average – what’s happened is the market has birfurcated, with a high end and a low end, and not a lot in middle. Lots of things have gone that way.

  4. chacha1 Says:

    The US healthcare industry, as currently constituted, is so enmeshed with politics that I don’t think it can be “fixed.” I think the system could be completely *changed* but that’s a whole ‘nother debate.

    As a non-economist and a non-healthcare-professional, my uninformed opinion is that advertising pushes pricing much more than people realize, the cost of medical education likewise, and that the cost of the vast administration required for healthcare providers and health insurers pushes pricing even more than that. I don’t think the actual cost of the gear, or the drugs, or the salaries of doctors/nurses has much if anything to do with our situation.

    If/when a new national law is passed that removes the individual mandate, I won’t be affected unless the new law also removes the employer mandate – which, frankly, I’m not opposed to. (I think the employer mandate also pushes pricing. There is no way an annual premium in excess of $20,000 for a healthy, low-risk pair of adults is reasonable.)

    If my employer stops providing health insurance, I can get it through my state. (A plan through the state would cost me less than my share of my employer’s plan.)

    If I am lucky, my state will allow catastrophic-care or super-high-deductible plans that will keep my premiums down. I have enough $$ to pay out of pocket for basic preventive care, which is exactly what I’m choosing to do for dental care; the dentist I like does not participate in the plan offered through my employers. If I ever need something really expensive, I’ll find a practitioner in the network.

    • nicoleandmaggie Says: Getting rid of the employer mandate is likely to make the entire health insurance system collapse.

      It sounds like you agree with some of the Republican talking points?

      I mean, these things are empirical questions. Like, we have estimates of how much each of those items has to do with increases in health care costs.

      • chacha1 Says:

        Yeah, but I don’t know what those elements all truly amount to, and if I don’t then neither do most other Americans. I’d venture to guess the only people who really know are economists who study the healthcare industry.

        Is the cost of *actual healthcare* the problem – or is it the cost of *health insurance* that’s the problem? For me, figuring out why health insurance truly costs such an insane amount has to come before making a judgement on whether actual healthcare costs more than it should. And that’s why most people, I think, can’t be rational on this topic, possibly me included. Because all the contributing factors are either hidden or inexplicable.

        A lot of people, I believe, really do not make the connection between those multiple ads for prescription medications that come between the 8-12 minute segments of a television program and the cost of their health insurance. A lot of people, again, think “oh something for my restless legs” and … get a prescription, instead of going for a damn walk and doing a few stretches.

        And also, one may “know” that health-insurance premiums go into a pool that provides all possible procedures (to those with plans that cover such things), while at the same time looking at the giant bite the premium takes out of one’s monthly income and the tiny amount of actual healthcare one receives in return, and thinking “this sucks.”

        To me, $150 for getting my teeth cleaned is not unreasonable. $350 for a mammogram is not unreasonable, especially because I only have to get one every other year. But … I bring home $3600/mo after taxes, health insurance, 401k, HSA, etc. Those costs are unreasonable for people who bring home $1200/mo and have no 401k or HSA, or who have problem teeth, or who have a family history of breast cancer.

        No idea what the Republican talking points are. :-) Going down that rabbit hole has no appeal. For the record, I think single-payer is the only sustainable health-insurance system, but I don’t think it’s sustainable with ALL THE THINGS available for ALL THE PEOPLE, not when our culture fosters such colossally unhealthy behavior. We’re going to have to draw some lines as to what’s covered, and how.

  5. nicoleandmaggie Says:

    IIRC, drug advertising does increase costs, but not that much in the big picture. I think one of my friends has a paper on it.

  6. becca Says:

    My top 10 completely uninformed ideas to make healthcare cheaper:
    *Eliminate all direct to consumer advertising and allow only peer-reviewed scientific journal advertising to physicians (like, no free lunches with hot drug salesladies for doctors, all you can do is email them your latest paper)
    *Require all med students, and all malpractice lawyers, to read the article from a few years back demonstrating that a simple bolus IV actually killed more kids with malaria (NB: in a resource-limited setting; hearing the story from the authors, it was HARD to get the true negative control group past an IRB since “everybody knew” if you have a sick kid, they need rehydration). We all have a bias to *act*, and we need to be aware of the consequences of that bias.
    *Hospice-facility fundable by Medicare; other options to keep people from bouncing between expensive rehabilitation facilities and expensive hospitals when things are futile. Actual death panels. Not for selecting who doesn’t get treated, but for helping people holistically to cope with the inevitability of it.
    *Invest in cell-free DNA testing and ensure that abortion for medical reasons is socially supported. I know I might sound creepy eugenics here, but I really think it’s wrong to not give parents options on this.
    *Whether you have health insurance or not, preventative care with a huge public health impact (e.g. all childhood immunizations, flu shots for community workers at risk, STD testing, ect.) needs to be free at point of service. It’s much easier to see this working with single payer, but I don’t care how we get there.
    *Fund longitudinal studies of people with chronic conditions to see what the cheapest care over the long-haul is. If it’s cheaper to buy 10 people fresh fruits and veggies than to pay for 1 diabetic amputation with disability, for goodness sake we need a system that facilitates that (NPR had a story about Geisinger in PA working this one out- I want to know how to bring it to scale).
    *Reallocate residency slots to dramatically reduce the physician inter-specialty pay disparities, empower PAs and RNs to do anything a physician can do over time (as they acquire experience and/or pass certifications; keep it evidenced based over time)
    *Mandate a single system of medical records that seamlessly follows people through their lives and make it hacking resistant. That’s probably a job creation project for several thousand programmers, and I’m not sure it’ll actually be cheaper, but for goodness sake it’s overdue.
    *Ban Oxycontin. Use evidenced based policy to address the newest overdose prone opiates, provide holistic integrated support for people battling addiction, and involve the criminal justice system only in drug cases where people are putting others in dangers (e.g. a DUI is a criminal justice matter, being addicted to crack is a medical problem)
    *All pregnant women get a pregnancy care manager, and they are trained in the latest evidenced based approaches to maximizing maternal and infant health

    • chacha1 Says:

      Those seem like sensible ideas to me. :-) “A Country Doctor Writes” has a lot to say about electronic medical records, as currently constituted.

  7. Revanche @ A Gai Shan Life Says:

    Definitely not an economist so I feel out of my depth with this. There are people who work in healthcare and share on Twitter (citing my source, sort of!) that the prices listed for healthcare are not necessarily the actual prices of healthcare. I haven’t dug deeper but I seem to recall that there’s an issue of inflated pricing in there along with the other complications of shouldering the costs of innovations and so on.

    • crazy grad mama Says:

      As a consumer of healthcare, that was my first thought too: there is a huge disconnect between prices and reality, and a lot of that comes from the weird world of negotiations between providers and health insurance companies.

      For instance, the hospital billed my insurance $30K for the birth of my son. No one paid $30K, though: my insurance said no, the negotiated price is $4K, of which they paid $2800 and I paid $1200. You might think that uninsured patients make up the difference, but I know (because in a rare case of providing cost information in advance, they gave us the price sheet) that this hospital charges uninsured patients about $4K. So why does the $30K number even exist?

      • nicoleandmaggie Says:

        Most likely insurers with less negotiating power are paying something between 30K and 4K.

      • Prodigal Academic Says:

        When I was between finishing my PhD and starting my postdoc, I had a catastrophic insurance policy (all I could get–in King County, Washington state, you got insurance through your employer or not at all. Since I had no employer, I was stuck with the catastrophic policy offered by my Professional Society). I unfortunately got sick with symptoms that could have been meningitis, but were really just a random virus. My office visit and lab tests cost me the unnegotiated rate–I paid $350 for the office visit and $550 for the blood tests. This was my regular doctor, so I know insurance paid $60 + copay for an office visit, not sure about the blood tests. I suspect uninsured people pay $4k, since that is what they can collect considering you can’t get blood from a stone. For less expensive things, I bet they charge a larger fraction of the “official” price.

  8. J Liedl Says:

    *clings to her Canadian single-payer health system with every last ounce of energy* I mean, we have insurance companies here to cover all sorts of care outside the mandate (especially dental, vision, and various therapies along with drug benefits, although there’s work to wrap more of those into the coverage). Pharmaceutical costs get controlled somewhat by the massive power of the provincial plans for seniors and those on assistance means that companies can’t offer wildly different costs for the same item without incurring the insurance companies’ wrath for all the people they cover who aren’t in those public programs.

    It’s still really hard to keep health care costs in line. One element that gets a lot of coverage is the enormous cost of alternative levels of care for the elderly. Someone falls and goes to the hospital where they stay because there’s no rehab centre or residential home ready to take them. The government ends up paying enormous rates to keep those people in hospital beds because they don’t have places for them at much cheaper rates in nursing homes. Bah!

  9. Dave Says:

    Baumol’s cost disease…. the prices of goods and services produced by industries where worker productivity is rising slower (e.g. health, education) rise relative to the prices of goods and services where it is rising faster (e.g. telecommunications). This is because of competition for workers between industries means that the wages paid across industries can’t vary that much. I think part of the story also is that health care has improved and so workers in the industry are more productive (though not as dramatically as in some other industries) but people still think of the service as going to the doctor, going to the hospital and not the outcome they get. So, there is an increase in the price they pay for those things but actually they are buying more health outcomes than before.

  10. Sandy L Says:

    The reason I scratch my head on this is along the lines of innovation, which is what I do as a job. In most technologies, the inflation adjusted cost goes down as workers and technologies become more productive and efficient. Is Giving birth really that much more technologically advanced now than it was 15 years ago? It sure doesn’t seem so.

    I like the comment above regarding having universal coverage for basics like childbirth, immunizations, etc. If you want 8 million tests for something, that should be okay if you are willing to pay out of pocket for the extras.

    I really hope some progress gets made. At least we are all talking about it. Hopefully something good will come out of all the attention this is getting.

    • nicoleandmaggie Says:

      The ACA had lots of provisions for trying things out, but also said that they could not legislate their findings.

      C-sections are a lot better even in the past 15/20 years. Prenatal care has also improved. (But maternal death rates are going up in the us probably because of politics.)

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