Andrew Sullivan fumes over the fact that the price of healthcare continues to go up despite the fact that utilization is not, and concludes that healthcare providers (generally hospitals and doctors) are "rent -seeking." The allegation here is that doctors and hospitals are jacking up the prices for services simply because they can, because they (we) enjoy a monopoly on the provision of healthcare and are able to set rates as we see fit.
There is a grain of truth to this logic which makes it an appealing argument. Part of my job is to fight with insurance company executives for the highest possible reimbursement. It's always, as the euphemism goes, a "spirited discussion." Sometimes I win and get more money, sometimes not. In my state, and in my experience, there's been a balanced power dynamic where neither the payers nor the providers enjoy significant leverage over the other. There are, however, many states where payers have de facto rate-setting power, and there are some markets in which certain providers, due to their size or cachet, are able to drive these negotiations towards outsized reimbursements.
But what of Andrew's central allegation? Is this, as the puts it, "The Great Healthcare Rip-off"?
I don't think so, at least not in the sense that we are using whatever leverage we enjoy to create outsized profits. Healthcare is a low-profit business. According to the AHA's Trends in Hospital Financing, the typical hospital's operating margin hovers between 2-4%, and about a third of hospitals run a negative operating margin in any given year.
Point is, that if hospitals do have price-fixing capabilities, they're certainly not using them to pad the bottom line. At least, not very effectively.
Similarly, physicians' income does not seem to be positively affected by this market power. Last time I looked at the raw data was in 2008, when I found that for the previous decade physicians' income had been flat-to-declining compared to inflation. I haven't seen any evidence that that trend has changed, and a quick glance at BLS data doesn't seem to show a spike in doctors' income.
So again, across the industry, I don't see evidence of profiteering. If anything, healthcare providers are just frantically trying to offset the losses from the economic downturn and reductions in public insurance reimbursements.
So why is US healthcare so damn expensive? I can't add anything rigorous to Aaron Carroll and Austin Frakt's extensive analysis of this issue from a couple of years ago, so I won't even try. But I will add one anecdote in the way of explanation.
The DaVinci robot. It's the coolest, got-to-have medical gadget of the decade. It does minimally invasive surgeries, particularly pelvic surgeries like prostate removal. And it is awesome. Check out this video of Swedish Hospital neurosurgeon Dr James Porter as he makes a paper airplane the size of a penny with the DaVinci:
As a gadget guy, I get the allure of such a toy, and the promise is exceptional. All the other hospitals in our area got these, at a cost of a couple of million dollars each, and the urologists at our hospital demanded that our facility purchase one also. If we didn't, they worried, we would be at a competitive disadvantage and would lose cases to regional rivals. Despite the relatively lower case volume and lack of a business case for the investment, they got their wish and we have the gadget too.
So the medical market is dysfunctional in a unique way: competition increases costs. This turns the laws of economics on it head, since in most other industry, increased competition drives prices down, not up. See: Walmart.
The kicker is that the outcomes for the robotic surgery do not seem to be any better than the traditional method of doing the procedure.*
Which brings us to the other big reason that US healthcare is so damn expensive. Physicians continue, over and over, to do procedures like DaVinci prostatectomies, like knee arthroscopies, like lumbar diskectomies, like coronary stenting for stable angina, like MRIs for low back pain, and many more, despite the fact that they have not been proven to be more effective or in some cases have been proven to be ineffective or harmful!
Of course, it's hard to convince someone that a procedure doesn't work when their income depends on their not understanding that fact.
So, returning to Andrew's thesis -- is American healthcare a "rip-off"? Yes, in the sense that the market is broken and full of perverse incentives and inefficiencies, and yes in the simple sense that we pay twice as much as the rest of the world and get no more value from that extra investment. But no, not in the sense that physicians and hospitals are deliberately maximizing their monopoly powers to realize excess value.
*Disclaimer: yes, I know the data is conflicting, and am very skeptical of the industry supported data showing benefit, given the huge profits the device manufacturers are making. Suffice it to say the technology is controversial, and that the enthusiasm for its adoption far exceeds any reasonable demonstrated cost-benefit ratio.