Making Sense of Health Care Prices

by John Goodman,

A study by Miriam Laugesen and Sherry Glied, published in Health Affairs, claims that the reason the U.S. spends more on health care than other countries is the Americans pay higher prices — in particular, higher physician fees. This claim is extraordinary, considering that doctors’ net incomes are only about 10% of health care spending and the amount by which U.S. doctor fees exceed foreign doctor fees is only a couple of percentage points.

The only explanations I can come up with … why [healthcare] cost so much more are (1) government regulations, (2) malpractice liability and (3) the inefficiencies created by the third-party payment system. It looks like these three factors are doubling the cost of U.S. health care.

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Let’s take regulations first. In terms of rules, restrictions, and bureaucratic reporting requirements, the health care sector is one of the most regulated industries in our economy. Regulatory requirements intrude in a highly visible way on the activities of the hospital medical staff and affect virtually every aspect of medical practice. In Patient Power, Gerry Musgrave and I described the burdens faced by Scripps Memorial Hospital, a medium sized (250-bed) acute care facility in San Diego, California. Scripps had to answer to 39 governmental bodies and 7 nongovernmental bodies. It periodically filed 65 different reports, about one report for every four beds. In most cases, the reports required were not simple forms that could be completed by a clerk. Often, they were lengthy and complicated, requiring the daily recording of information by highly trained hospital personnel.

Then there is the malpractice system. Estimates place the burden of the system at between 2% and 10% of the cost of U.S. health care. But it’s hard to separate out the effects of malpractice from the effects of regulation. Remember, both institutions are trying to do the same thing: reduce the incidence of adverse medical events (no matter how imperfectly). If a hospital fails to follow a regulation, and that failure leads to a patient death, the failure would undoubtedly be the basis for a malpractice law suit. So the existence of the malpractice system helps encourage compliance with regulations — making them more costly.

Finally, there are the inefficiencies produced by the third-party payment system. We have previously pointed out that when providers do not compete for patients based on price, they typically do not compete on quality either. In the hospital sector, they tend to compete on amenities instead. But the way you compete on amenities is to spend more on amenities. And this adds to costs.

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