Profit motive drives US health-care cost disparities

Contributing WriterJune 19, 2013 

Back when he was president, Ronald Reagan famously (or infamously) took to reducing complex concepts to simple ones the public could easily understand.

For instance, to explain the size of our nation’s debt, which in 1981 had just topped $1 trillion, he summoned the image of one trillion dollar bills stacked one on top of the other. My mind’s eye still can see that tower of bills reaching up beyond the stratosphere, extending one-quarter of the way to the moon.

One trillion dollars is indeed a lot of money. Reagan guessed right: It’s an amount too large for most of our brains to comprehend. But the $1 trillion I’d like to focus on is not related to our nation’s debt, but rather to our medical bill. This unfathomable amount is a reasonable guess as to the excessive sum Americans spend each year on health care.

Earlier this month, New York Times’ reporter Elisabeth Rosenthal published an article on our nation’s health care expenditures, expenses which exceed other countries’ by a long shot. To explore why this is, Rosenthal examined a single procedure, the colonoscopy. She found that doctors often perform these exams more frequently than medical guidelines recommend. Moreover, colonoscopies cost 50 percent more here than they do in other developed countries.

Rosenthal concludes that what is true of colonoscopies is true of many other routine procedures, tests and common drugs: “Americans pay more ... (and we’re) prescribed more expensive procedures and tests than people in other countries.” And we don’t get better results for it.

In reaching this conclusion, Rosenthal examined data compiled by the International Federation of Health Plans (IFHP) on a nation’s average cost for 28 common drugs, scans and procedures. The IFHP found that the average charge for 26 of these was highest in the U.S. — almost always by a lot — and for the remaining two we placed a close second.

Aside from its high costs, Rosenthal’s article highlights a second unique feature of our health care system: its wide variability in prices. Some places in the state of New York, for example, charge 10 times more for a colonoscopy than do others.

This is not unusual. According to the IFHP, the U.S. often has cost differentials this large; it’s true for angiograms and CT scans, and the prices charged for MRIs, appendectomies, C-sections, normal child deliveries, and knee and hip replacements are also perplexingly all over the map.

Health care is one area where one can mislead by simplifying too much. But it isn’t too much of a generalization to say that the main problem with our medical care system lies in its economic incentives. In most industries, the profit motive drives producers to innovate in a way that creates more value for the dollar. But health care is different.

Here, the drive for profit results in the industry prioritizing expensive procedures over the cost-effective ones — as Rosenthal shows with the movement of colonoscopies from doctor’s offices to boutique facilities with specialized personnel. This explains why a typical colonoscopy can cost two to four times more here than in many European countries. And differences in delivery help explain why within our own country, identical procedures are priced so differently.

It’s not hard to explain why the profit motive in health care doesn’t tend toward delivering greater value. Because of insurance, consumers aren’t in the market for value. Think of the last time you factored price into a decision you faced over your health care options.

And even if we were in the market for value, how would we know it when we saw it? Is there greater value in a $5,000 colonoscopy that takes place in a specialized facility, or in a $500 one that occurs in your doctor’s office?

No other developed country allows the profit motive to dictate health care policy to the extent that we do; they don’t because doing so would mean leaving too many citizens without insurance, and all of us with unchecked costs.

If we were to follow the example of other countries, we’d more closely monitor the cost-effectiveness of our health-care dollar. This is one example where government involvement can actually create efficiencies. In our case, more than one-third of America’s $2.7 trillion health-care bill is at stake.

That’s a sky-high amount.

Katie Baird is an associate professor of economics at the University of Washington Tacoma. Email her at kebaird@uw.edu.

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