Why are U.S. health care costs twice as high as the OECD average and rising? A few major factors:
1. Too much care covered and too much care needed
As insurance takes over larger shares of health related-goods for things that are not both expensive AND uncertain (see Part I) we’ve added layers of administrative cost and new layers of profit margins, as well as introduced moral hazard
to inflate prices.
Second, when the healthcare system is not structured with strong incentives for prevention, we end up needing more care (see Part III).
2. Feeding frenzy between costs and regulation
Health care consumption faces a problem of asymmetric information- where patients may not fully understand their own needs or how to evaluate quality. This is why some aspects of healthcare markets are regulated-- to ameliorate this information divide. However, rising costs often lead to calls for more regulation, unrelated to information, but instead to distribution of care or related concerns. Instead of lowering price by increasing supply, more regulation raises administrative burdens for both regulators and providers. This decreases supply by increasing the costs of providing care, which increases price …and we’re back to the start of the loop.
3. Radical thoughts on fundamental structure
Milton Friedman wrote a compelling article in 2001, 5 years before he died, narrowing in on the core of modern industrialized health insurance. (Enjoy and ponder it here.) The current U.S. employer-based insurance system was a response to wage freezes during WWII. Employers hiring in a tight labor market tried to use health insurance, instead of wages, to entice new workers. The subsequent tax-exempt status of employer-sponsored health insurance means you can now buy $1 worth of Ferrari with your wages (everyone’s top choice!) or instead $1.28 of health care (2021 tax rate (1)). What a bargain! However, this incentive structure encourages spending a larger fraction of income on medical care than we would otherwise- if it were taxed like other essential goods such as food, shelter, and clothing.
Nationalized systems don’t escape rising cost incentives either—these systems create incentives to increase coverage and health care benefits to garner political votes. Once the voting population is completely covered, politics may transition from coverage to cost control, which may explain other nationalized healthcare systems’ high levels of spending but lower rates of price increases.
I'll close this mini series on insurance with a quote from Friedman, a critical statement questioning the status quo: “Without medical insurance” and “without access to medical care” have come to be treated as nearly synonymous. I hope that the four lessons here have given you some insight (and maybe future policy optimism) about where becoming comfortable separating the two might actually improve health care.
(1) Bradbury, David, Harding, Michelle, and Paturot, Dominique. “Taxing Wages 2021- the United States” OECD Centre for Tax Policy and Administratio
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