Ask the Editors: Why Does Health Care Cost So Much?

Multiple readers want to know why US health care costs so much.  A complicated and fascinating question on which agreement across ideological lines is extremely limited.


Proponents of national healthcare prefer to blame the administrative costs of private health insurance, the bad incentives of private health insurers which cut corners on preventative care, greedy providers (drug firms especially), and excess reliance on emergency rooms.

Perhaps predictibly, I find this unconvincing.  Since private insurance covers about 36% of health care expenditures, it's hard to imagine how the savings could possibly be that big.  And indeed, it seems that the net cost of private insurance accounts for about 7.3% of healthcare spending, which itself is about 16% of GDP--about 3-4 percentage points higher than our nearest competitors.  So we might save a little over 1% of GDP if we got rid of those parasites--but it wouldn't make up the difference between us and high-rent systems like France and Switzerland, much less lower cost providers like Britain.

And as Arnold Kling points out, it's not that easy to get rid of the private insurers:

Suppose we were to abolish private health insurance tomorrow and put everybody on Medicare. Here are the things that would happen.

1. You could get rid of everybody in the private health insurance industry. That would save at most 15 percent of health care spending.

2. There would no longer be a private-sector benchmark for Medicare to use in pricing. You would need to hire a lot of those former private health insurance folks to work for Medicare to figure out what every medical service is worth, to negotiate prices with doctors, hospitals, and so on.

3. Medicare would have to process more claims, which means you would have to hire back some more of those former insurance workers.

After (1)-(3), costs might be less than the existing system. By a small amount.

Likewise, drug industry profits were a tiny portion of healthcare spending.  If we eliminated all profits--hell, double it to account for the much maligned "marketing costs"--we'd possibly push down expenses by another 0.5% of GDP.  But as with insurance administrative costs, it's more complicated than that.  Without profits, no one would do R&D--and on net, drugs save us money, because they often replace expensive procedures.  Years of statins are still cheaper than one hospital stay for a heart attack or stroke.  And about half the marketing cost is free samples, which most people would agree are a good and useful device for letting patients see whether a drug works for them.

As for emergency rooms, there's not all that much evidence that lack of insurance is the primary issue there.  First of all, it seems to be a worldwide problem.  Second of all, a recent report from the state of Massachussetts indicates that insurance is not the driving factor:

First of all, inappropriate -- or non-urgent -- use of the Emergency Room was not limited to uninsured populations. It showed up across the board. People covered by private insurance, Medicaid and Medicare were just as likely to use the ER for non-urgent care as people without health insurance. About 20% of all ER visits by privately insured and Medicare patients were for non-urgent purposes. About 24% of all ER visits by Medicaid beneficiaries and people without any insurance were for non-urgent purposes.

Reading between the lines, poor people are more likely to use the emergency room for non-urgent care than those in upper income quintiles; presumably, this has more to do with their chaotic lives, lack of control over their work schedules, or planning skills than the payment problem, since Medicaid patients show the same usage patterns as the uninsured.

Finally, preventive care.  It is true that if people with certain chronic diseases do everything they're supposed to--not just visit the doctor but comply with their treatment regimens--it probably saves money in the long run.  But this is a complicated problem.  Compliance with treatment regimens often fails not because the patient doesn't go to the doctor, but because the patient doesn't check their blood sugar multiple times a day, take their inhaled steroids and pills at the scheduled intervals, cut salt and fat out of their diet, or what have you.  Also, people who don't die of diabetes now may just die of diabetes a little later, or of something else massively expensive, like cancer.  Preventive care may be an excellent way of enhancing net social welfare.  But the evidence that it saves money on the whole is not really there.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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