Why is this happening? Some argue that the U.S. is just very rich, and that prosperous countries choose to spend more on health care, which drives up prices. They note, for example, that although U.S. health care spending is unusually high as a% of gross domestic product, it's not that high as a% of individual consumption. But this isn't very convincing, because consumption is a result of high health care prices as well as an effect — high health care prices force Americans to use more of their income than people in other rich countries.
A new report by Josh Bivens of the Economic Policy Institute, a think tank, suggests that U.S. customers are indeed paying too much. Looking at how often Americans use specific medical services such as knee replacements and C-sections, he finds that they generally tend to use fewer of these procedures than people in a number of other developed countries. This strongly cuts against the narrative that Americans are simply choosing to consume more health care. They're using less, but getting charged a lot more. Bivens also demonstrates just how much higher U.S. health prices are than prices in any other rich country.
As for why prices in the U.S. are so high, there are several potential explanations. The simplest is sheer inertia and cultural complacency — as in construction and higher education, Americans pay more simply because they're used to paying more. Lack of transparency in health care pricing probably exacerbates the problem.
A second possible reason is health care providers' monopoly power. Often, patients don't have the option of driving a long distance to find a different provider. Research by economists Zack Cooper, Stuart V. Craig, Martin Gaynor and John Van Reenen has found that hospital mergers tend to raise prices more when the combining hospitals are close to each other — clear evidence of monopoly power in the industry. Consolidation of suppliers and middleman purchasers may also be a factor.
Economic theory suggests that the market power of sellers can be counteracted by the market power of buyers. In most other rich countries, which have government-run health insurance systems of one sort or another, the government is the main purchaser of health care. This allows it to negotiate lower prices with providers, passing the cost savings on to patients. And Bivens finds that in the U.S., Medicare gets better prices than private plans do:
So this would suggest that a government health insurance system — a single-payer system like Bernie Sanders's Medicare For All, or a public option like the Medicare X plan — would be able to reduce prices and bring American health care costs more in line with those enjoyed by other countries. Health care spending would still probably rise, as the population ages and per capita income increases, but at least some of the premium Americans now pay relative to people in France, Japan or Canada would vanish.
There's another good precedent for this approach — military spending. A recent paper by economists Rodrigo Carril and Mark Duggan found that although U.S. defense contractors have been consolidating, and have adopted a form of contracting that's generally favorable to contractors, defense procurement prices haven't risen as a result. The likeliest reason is that the government's market power cancels out that of even the biggest contractors.
There is, however, a potential problem with the government approach. As Bivens documents, employer contributions to health care spending have been essentially constant since 2009, with almost all of the spending increase coming from the government. This suggests that the government could be doing a lot more than it is now to negotiate lower health care prices. Why this is happening isn't clear; perhaps it's because government insurance is fragmented between Medicare and a variety of other systems, or maybe it's because Medicare and other government insurers are prevented by law or culture from wielding their negotiating power to full effect.
Any government system must therefore have price negotiation as its primary focus. If the U.S. continues to complacently accept ever-higher health care prices, ever more of workers' wages and national output will be sucked away with nothing more to show for it.
— For more columns from Bloomberg Opinion, visit http://www.bloomberg.com/opinion.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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