There has been much discussion recently of the high costs of healthcare — the fact that, on average, these costs (adjusted for inflation) have been increasing and will probably continue to increase. President Obama has certainly mentioned it while trying to build support for his project of reforming the healthcare industry. But he has also mentioned another, related problem — that so many Americans do not have health insurance or are in danger of losing it — and it seems to me that more legislative energy has been spent on trying to fix this problem than on trying to reduce the cost of healthcare. This is alarming, because the latter problem is a consequence of the former, and a solution to the lack of coverage is likely to become infeasible in the long run if healthcare costs continue to rise.
We should distinguish between two types of healthcare costs: the costs of the actual services (treatments, tests, consultations, etc) and the cost of insurance. Of course, the two are correlated: the cost of insurance will go up when the costs of services do. My contention is that the recent healthcare bills do too little to address the rising cost of health services. If I am correct, then the result of any of these bills, if passed, would be a country that still pays too much for healthcare, although with more people receiving it at the expense of the wealthy.
As for the cost of insurance, the potential effects of the proposals are mixed. Prohibiting insurers from refusing coverage of people with preexisting conditions and from increasing premiums when a customer is discovered to have a medical condition will increase the average cost of insurance, if it has an effect on it at all. On the other hand, requiring everyone to have insurance is likely to decrease the cost, because young and healthy Americans who do not require much medical service will be paying premiums to support old and sickly Americans. Insurance exchanges could also reduce the cost of insurance.
A public insurance plan, or nonprofit cooperatives, would also have a greater effect on the cost of insurance than on the cost of service. In fact, the only way I can think of that a public or nonprofit plan could reduce the cost of medical service is by enrolling so many people that it would have the clout to demand lower prices from service providers. But this approach would only go so far: push too much, and service providers will just stop providing service.
It is not clear that any of these proposals would lower the cost of even insurance (for individuals or employers not receiving subsidies), let alone medical service. But even if we all switched to the same government insurance plan — a plan managed without a profit motive — this country would still face the rising cost of medical service, and the average taxpayer would still pay too much for healthcare.
A Suggestion
I hate to complain without suggesting some solutions, but I unfortunately don't know of a complete solution to the rising cost of of medical service. The best I can do is discuss some things I (and, I'm sure, many others) have noticed about the healthcare industry that may indicate a way to mitigate this problem.
In a typical market, the price of the product is restricted by the ability of the consumer to choose a competitor's less expensive product, and by the fact that the consumer will choose to do without the product entirely if the lowest price is still too high. Remember, though, that in the real world not all widgets are identical, and so the consumer must choose between the less expensive Widget Model XY10 and the more expensive Widget Model XY20. To make a good choice, the consumer must be savvy about these types of products — not savvy about the technical, implementation-level details but about the user-level functions and their utilities vis-a-vis the consumer's requirement.
I believe that, today, in the medical-service market (that is, the market in which patients pay for doctors, medications, procedures, etc.), the consumer is not savvy enough to create this type of downward pressure on prices. Instead, health-insurance companies have become savvy consumer-proxies — second-guessing doctors' prescriptions, only paying for the treatments they regard as effective — which is why we hear complaints about insurance companies interfering in the relationships between doctors and patients. In this way, the insurance companies definitely do contribute to lowering service prices.
Given insurance companies' severe aversion to paying for services, why aren't prices even lower? I hypothesize that health insurance in fact causes overuse of medical services. To be specific: I hypothesize that health insurance causes people to consume (and, eventually, pay for) medical service that they would not consider to be worth the price if they had to pay out of pocket. A caveat: This hypothesis applies to the average health-insurance customer, who gives more money to the insurance company than the insurance company spends on him. Please note that the average health-insurance customer is still paying for all of his medical service: this hypothesis implies that, if the insurance were taken away from him, he would choose to purchase fewer medical services.
If this is true, how does it contribute to high service costs? Insurance companies can root out many unnecessary or ineffective treatments, but they cannot determine whether the benefit to the patient makes a service worth the cost — because that judgement can only be made by the patient. Therefore, if the service is not too bizarre, they'll just pay for it (as they are obligated according to the contract). Now, imagine that a neighborhood clinic purchases its first CT scanner; when a patient with a potential concussion sees a doctor at this clinic, the doctor can now offer to do a CT scan to check for bleeding in the brain. The doctor has no idea how much it will cost the patient or the insurance company, and so cost does not enter the conversation with the patient. So the patient evaluates the option of doing a CT scan in terms of the benefit (possibly preventing the patient from dying of a brain hemorrhage) versus inconvenience and discomfort. Price may have a part in the evaluation, but it would be greatly reduced to the form of a copayment or coinsurance. The result is that manufacturers and doctors are encouraged to minimize discomfort and inconvenience and not the cost of the service.
I am not claiming that my hypothesis is correct, but I think that it is probable and helps to explain the high cost of medical service. If it is true, then it implies that the cost of medical service will be reduced if the people who are currently overpaying their insurance companies were to instead pay most of their medical costs themselves at the time of delivery (everything else equal).
I am also not claiming that this hypothesis, if correct, accounts for the only cause of the high cost of medical service. There are definitely other factors, which many other people have pointed out: for example, the need for doctors to purchase malpractice insurance, and the incentive for doctors to overprescribe treatments and test.
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I think your analysis is correct as far as it goes. However there are other factors involved in the explosion of health care costs:
1. The aging of the population is an unavoidable increaser of costs, as older citizens are on average less healthy than younger. Short of rationing care to the elderly, or encouraging euthanasia, I don't think that much can be done about this.
2. American's terrible diet and the resulting obesity epidemic (which is also an epidemic of diabetes, hypertension, coronary artery disease, and stroke), is a MAJOR contributor to costs. Should certain foods --- 'junk foods' --- be taxed , or even banned e.g. no trans-fats be permitted in the food supply?
3. Lack of preventive care for many. This care would have to be paid for by the government, or by insurance companies. Such care should be mandated if and only if said care is cost effective.
What is a cost-effective intervention? If the costs of giving the test, vaccination, or intervention to everyone in the target population (a population defined by age, sex, weight, or high risk behaviors) is less than the cost savings that will result, then such preventive interventions, or tests are cost effective.
Cost effective preventive measures, may include: vaccinations, life style interventions, universal prenatal care, contraceptives to prevent unwanted pregnancies, screenings e.g. blood pressure, bone density scans (to detect osteoporosis in time to reduce the incidence of costly and life threatening hip fractures, breast and prostate and colon cancer screening, HIV testing, screening for peripheral vascular disease, ultra sound screening for abdominal aneurysms, ultrasound screening for carotid artery disease. Each of these interventions and others should be weighed for its cost effectiveness, and if cost effective be mandated to be paid for by insurance plans or by the federal budget.
4. Tort law reform is needed to drive down the cost of malpractice insurance. The cost of malpractice insurance, and settlements, and malpractice attorneys fees is inevitably passed on to whomever pays for health care. One way this could be handled is for each state (since each state independently sets standards for medical licensing) to have a malpractice compensation board. Instead of suing for malpractice damages, a patient (or their family if the patient dies) would present the case to the states malpractice board, which would be composed not of laymen but of experts in standards of medical care, and professional arbitrators. Contingent attorney's fees (which encourage outrageous awards and frivolous lawsuits) would be forbidden by federal law. The board would make a finding of whether malpractice had in fact occurred, and then would, by using a set compensation standard, determine what award to give to the patient. Physicians and other health care professionals who were found guilty of malpractice would on the first offense be censured, and placed on restriction as to their practice, and mandated to take further medical education aimed at preventing future malpractice, and on the second or third offense would have their license to practice suspended. Threat of loss of their license to practice is a VERY strong incentive for any health care provider to avoid performing needless or excessively risky procedures.
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