Medical Competition and the Cost of Medical Care-Becker

Patients in the United States pay considerably more for standard medical procedures, like colonoscopies or mammograms, than do patients in Switzerland, Germany, and other rich countries. One important qualification is that international comparisons of health costs, as in the New York Times’ article referred to by Posner, do not adjust for differences in quality of treatment, such as quickness of access to the procedures, speed of reporting the results, and so forth. The US does better on some of these quality dimensions, but probably patients pay more in the US even after adjustments for the quality of treatment.

The health care delivery system in the United States is based on strong competition among private physicians and not for profit hospitals. Although a full consideration of why procedures are more expensive in the US would require the analysis of many factors, I will concentrate my discussion on whether this competition among physicians and hospitals is an important factor raising the cost of procedures.

As Posner indicates, the great majority of patients have only limited knowledge about the procedures they need and the quality of physicians and hospitals. Doctors and hospitals interested in increasing their revenues can sometimes take advantage of this consumer ignorance by suggesting expensive procedures and medical treatments that are not warranted. This incentive to push for excessive treatments may be stronger in the US because physicians and hospitals’ incomes in the US are more closely related to the cost of treatment than in most of Europe and Japan.

However, most American consumers of medical care, even when ignorant of the treatments they need, have some protection against excessive medical care. The federal and state governments through Medicare and Medicaid pay over 35% of total spending on medical care in the United States. The American government officials involved in approving payments for different procedures have no more financial interest in approving excessive charges for different treatments than do officials in other countries.Medicare and Medicaid do get lower prices for different procedures than most private insurance companies because the government can use its economic power in the health market to get better prices.

About 55% of Americans, 68% of employed persons and another 1/3 of those without jobs are covered by employers’ health insurance. The tax deductibility of their health care costs gives employers an incentive to increase the extent of the coverage provided employees, and reduces their incentives to increase co-pays and other costs borne by employees. This distortion in incentives to keep down health care costs is not caused by competition in the health care sector, but by the tax treatment of employer spending on health care. The Affordable Care Act reduces the tax advantage to employers of more expensive health insurance plans-the so-called “Cadillac” plans-presumably because of the belief that these plans allow treatments and other medical care that are not necessary and too expensive.

Still, even when their spending is tax deductible, employers have the same financial incentive to reduce their spending on expensive medical care as they do in lowering other costs that are tax deductible. They try to reduce health costs by the type of health insurance coverage they provide employees. The larger firms also hire knowledgeable specialists on health care that are informed about what kinds of treatments are useful for different medical problems and what they should cost. They also try to educate their employees about healthy eating and other behavior. Employers help themselves while protecting their employees against redundant and expensive treatments and care suggested by physicians, clinics, and hospitals.

Even consumers ignorant of their health care needs have an incentive to reduce their medical spending because they have to pay health insurance premiums and out of pocket payments for medical care. Yet one problem with the American health care delivery system is that it has much lower co-pays than many European countries; out of pocket spending on health care is only about 11% of all US spending on health care compared to, for example, over 30% in Switzerland. This means that American patients have much less incentive to economize on their health care spending than do the Swiss.

I am not arguing that the American system of health care is ideal or efficient, or that it does not allow for excessively expensive procedures and other treatments. I am suggesting, however, that strong competition among doctors and hospitals is not the major reason why the US spends much more on health care than do other countries.

 

 

Comments

[Glenn Law]

Well, my question is: as to what point these higher hospitalization cost reflect a larger quantity of concentrated and effective and quality high-tech care being provided, and to what extent its just a matter of higher prices?

[jim kirby]

The possibility that the greater costs in Amerika reflect higher quality high-tech care is belied by the equal or better outcomes in countries where care if far cheaper.

[Terry Bennett]

Whenever the people who consume are not the people who pay, watchdog effort is undermined and prices rise despite the presence of competition. If nobody is looking at price, then price ceases to be a competitive factor.

In the Philippines, most of the middle class owe their status to the fact that they have a family member working outside the country and sending back dollars. In most cases this is not the difference between eating and starving. Rather, it is the difference between flip-flops and Nike Air Jordans. The people who buy signature brands have no idea how much work it took their sister the domestic helper in Italy to earn the money for that Gucci pocketbook.

The economics of health care are not constrained by price, and so to answer Judge Posner's question, yes and no: American health care is too costly for the payers, but it is not too costly for the blissfully ignorant consumers thereof. Until the responsibility is properly aligned, we are destined for more of the same.