Why Does Health Care Cost So Much in the US?

Matthew Yglesias cites an NPR prodcast exploring the question: Why does an MRI cost 10 times as much in the US as it does in Japan? (Note: I haven’t listened to the podcast but the same question is explored by NPR in text form here).
This question is a variant of one that has been asked before many times: Why does health care cost so much in the US, compared to other nations? Many times the assumed answer is that the difference is because of waste and excess profits in the system. While I don’t dispute that there is some of that, there are also many other logical reasons why health care costs differ from country to country. The argument from those who propose a single-payer system, or at least that we move in that direction, are based on the implied assumption that our costs would be as low as other nations if we would just mimic their system. That is not true because there are factors that influence the price that are completely independent of the health care system itself.
The two main components of health care costs are technology and people. Let’s look at each one individually.
Technology
The CBO estimates that the adoption of new technology is the leading contributor to rising health care costs. However, rising costs isn’t the question here. The CBO also says that health care costs are rising in all nations. The question here is not the increase in costs, but why there is a difference between costs in the US and elsewhere.
There are a number of reasons for this, some of which were touched on in the NPR article above. I want to explore one of them that also applies to the pharmaceutical industry. When NPR asked US doctors and hospitals why MRI machines cost so much less in Japan than in the US (emphasis mine):
Japan sets the price they pay for MRIs super low. And so to get into the Japanese market, the manufacturers lower their prices. They charge more here in the U.S. because we will pay more. How come? Well, I called a number of American hospitals and doctors and I got basically two reactions. The first and most popular: a shrug. We could never get those prices.
So, MRI manufacturers are selling the machines in Japan at a lower price than they are selling them in the US. Why is this? Maybe it’s the same reason that drugs cost less in Canada:
They are engaging in what economists call “price discrimination”–that is, charging different prices to different buyers of the same product. Price discrimination works in the drug industry because drugs are very expensive to develop, but fairly cheap to manufacture. As long as companies can recoup their research and development costs by charging high prices in the United States, they can make a profit in Canada and elsewhere by merely covering the cost of making the pill (or tube of ointment or whatever).
To restate, developing a drug (and I imagine the same hold true of advanced medical equipment like an MRI machine) the cost to develop the product itself is high. Once you have a design that works, you can crank them out on the assembly line relatively cheaply. So, if there is a market that is only willing to pay a certain price you can still make a profit by selling to them, but only if you have another market that you can sell to for more in order to recoup the cost of R&D. In other words, if the US set price controls for MRI machines like Japan does, or if Americans were not as wealthy and could not afford the high cost of the machines, there wouldn’t be any MRI machines because manufacturers wouldn’t be able to recoup the cost of R&D and therefore they would not be profitable.
We should not expect technology to cost the same in different countries. There are many factors that play a role in the cost, and this is just one of them.
People
The second major component of health care costs is people: doctors, nurses, lab technicians, and many other high-skill professionals. Health care is inherently a labor-intensive industry, and not just any labor: high-skill labor. According to the International Average Salary Income Database, general physicians and nurses in the US make about 75% more than their Japanese counterparts. Although the numbers for more specialized physicians aren’t listed, we know that in the US they make much more than general physicians and so the gap is likely to be even larger.
So the solution to our cost problem is simple, right? As one commenter on Yglesias’ post said (I’m not sure if he or she was serious): “force nurses, doctors and teachers to work a lot longer for a lot less money.” Not so fast. First, we need to look at the reasons why health care professionals are paid so much more here. Are they just more greedy? Well, how about we compare them to similarly educated professionals in other industries. The US pays a much higher price for high-skill labor across all industries, while the price of low-skill labor is comparable to other nations. This should come as no surprise to those familiar with the high and rising income gap in the US.
So what would happen if we force doctors and nurses to accept lower wages? Fewer post-grad students would choose to go into medicine, and instead would choose other paths such as law or dentistry. That would quickly lead to shortages of medical professionals, something already being experienced by nursing staffs. I believe one of the best ways we can combat this problem is improving our education system so that we produce more highly educated graduates to compete for those jobs, but that is a different discussion. The point is that, at least with respect to this contributor to health care costs, it is not the health care system that is the problem. The labor cost is driven by factors outside of the health care system that cannot be adequately addressed by health care reform alone.
Conclusion
Again, let me reiterate that I do believe there are steps that can be taken to lower the high cost of health care. However, comparing the cost of health care in the US with the cost in other nations exaggerates the problem since it does not take into consideration factors that are beyond the scope of the health care system itself, and some of which are not necessarily bad things. We should focus on reducing the growth of health care costs, but let’s not fool ourselves into thinking we can cut it by a factor of 10, or even that we should.
(I should note that I am doing some research on the side regarding the rising cost of health care. I was going to do a post, or a series of posts, in the future. I wanted to response to Matthew’s post, however, so my arguments in this post are a work in progress. Critique, as always, is welcome.)
Old News: LDS Church Doesn’t Hate Gays

The LDS (Mormon) Church recently shocked almost everyone (except for Mormons) when they announced that they would support a Salt Lake City ordinance protecting housing and employment rights for homosexuals. After last year’s battle over Proposition 8 in California, some in the media are calling this a “huge change” and indicative of the church wanting to get Mitt Romney elected.
Let me be clear: As a member of the Church of Jesus Christ of Latter-day Saints, I support my church’s position on the matter. However, I wouldn’t necessarily be disappointed if this did really represent a change. But the truth is that this is not a change from any previous policy, and the fact that so many think it is indicates the success of the smear campaign that has been waged on the church since its involvement in Proposition 8.
At the time that the church was involved in Proposition 8, it issued a statement which included this:
The Church’s opposition to same-sex marriage neither constitutes nor condones any kind of hostility towards homosexual men and women. Protecting marriage between a man and a woman does not affect Church members’ Christian obligations of love, kindness and humanity toward all people.
In 1999, the late President of the church, Gordon B. Hinckley, said this to all the members of the church during its bi-yearly conference:
We believe that defending this sacred institution [of marriage] by working to preserve traditional marriage lies clearly within our religious and constitutional prerogatives. Indeed, we are compelled by our doctrine to speak out. Nevertheless, and I emphasize this, I wish to say that our opposition to attempts to legalize same-sex marriage should never be interpreted as justification for hatred, intolerance, or abuse of those who profess homosexual tendencies, either individually or as a group. As I said from this pulpit one year ago, our hearts reach out to those who refer to themselves as gays and lesbians.
Any opposition to gay rights expressed by the church has always been targeted specifically at gay marriage, not other protections. This has not changed. What has changed is that apparently some, swayed in some measure by the attempts to paint Mormons as the poster-children for bigotry, assumed these statements were just lip service. But they now are finding out that the church actually meant what it said. This comes as no surprise to most Mormons who were paying attention to the counsel of their church leaders.
I have to give credit to Andrew Sullivan. Although he has not been kind to the LDS Church in the past, he respects its (perceived changed) position:
They have made a distinction – and it is an admirable, intellectually honest distinction – between respecting the equal rights of other citizens in core civil respects, while insisting – with total justification – on the integrity of one’s own religious doctrines, and on a religious institution’s right to discriminate in any way with respect to its own rites and traditions….
And what I have long observed among Mormons – unlike some other denominations – is also an American decency that tends to win out in the end. I’ve never met a nasty Mormon. They put many Christians to shame in their practice of their faith and the civility and sincerity with which they live their lives. And this decision in Salt Lake City – not an easy or inevitable one – to make a clear distinction between civil marriage and other civil protections is one worthy of respect.
Gee thanks, Andrew.
The Next Best Thing for Health Care Reform

As a supporter of the free market (although not a purist), I tend to prefer a solution to our country’s health care problems that enhances the advantages of the market, rather than places more government bureaucracy on top of it. But a bill that decreases government involvement in health care, rather than increases it, is about as likely to get passed as a white male was likely to have been nominated for Justice Souter’s seat on the bench. So that begs the question: if the conservative approach to health care reform is not viable politically, what is the next best thing we can hope for?
What about the much maligned status quo? Even critics of the reform proposals agree that our current system has problems, but would doing nothing be better than the current proposals? Even if some believe that to be the case, few politicians would admit it for fear of being labeled a defender of a broken system. But is the best option on the right to try to block reform and stall, in hopes of gaining political power in future elections, thus making a more conservative approach more viable? That might be tempting, but given the track record of Republicans on getting any major reform done in our health care system, I wouldn’t bet on that approach working out. A few of us are in the unfortunate circumstance of needing the liberals’ zeal to get something significant done and the conservative ideas to get the right thing done. It’s tough to have both at the same time.
What about a compromise approach? The Senate finance committee has recently come out with a bill that it believes to be more moderate than its counterparts. No public option. Less harsh mandates. Almost universal disapproval. Does compromise mean pulling in all of the best ideas from all sides, or the worst ones? In this case, we have none of the cost controls and all of the government bureaucracy. In an attempt to find common ground, it appears the finance committee has found no-man’s land. Worse still, if something along those lines passes, it is likely to give the impression that something has been done, when in reality nothing has been done except complicating the system even more. This impression is likely to cause real reform to be significantly delayed as we have an endless debate about whether the plan is really working or not (see the current debate about whether the stimulus is working).
How about this for the Next Best Thing for conservatives? Let the liberals’ plan pass. Yes, that’s what I said. Put in that strong public option and individual mandates. Punish those greedy private insurance companies and those evil employers that don’t provide insurance to their employees. Why might that be The Next Best Thing? Because when someone asks, “Why can’t I find a plan a low-premium catastrophic plan?” We can tell him that the government didn’t think that would be good for him. And when someone says, “I got laid off because my employer couldn’t afford the health insurance he’s mandated to pay for.” We can say, “Thanks for taking one for team.” Or when someone on Medicaid Advantage reports that their plan has been discontinued, and they are now forced to find another, we’ll just tell them they were part of the waste in the system that had to be jettisoned. Maybe then there would be more pressure to consider more conservative-minded approaches. (Or, maybe it would actually work. Either way, the American people win in the end.)
There was nothing like prohibition to solidify the idea that alcohol ought to be legal. Nothing like Vietnam to make the public wary of the casualties of war. Nothing like repealing Glass-Steagall to remind us of why it was there in the first place.
Does this idea sound good to me? No. I don’t want to see people in our country suffer. And it would likely take decades to undo the programs that would be put in place. I didn’t say it was The Best Thing. I suggested that maybe it is the Next Best Thing. If conservatives believe that liberal health care reform would be a harmful to our country, should they let the liberals prove it? Just a thought.
Cash For Clunkers: Simply Unsupportable

For those who don’t know, the government will give you $4,500 to trade in your old clunker and buy a brand new car. Sounds like a good deal, but as far as public policy is concerned, the program is simply unsupportable.
There are two reasons that proponents give to support the program:
1) The program supposedly helps the environment by getting gas guzzlers off the road and replacing them with newer, more efficient cars. It is debatable whether the program has any positive impact on the environment at all. And even if it does, the minimal impact begs the question: what else could we have spent that money on that would have helped the environment much more? It’s a little like going out to an expensive restaurant, and then justifying the expense by saying, “Well, we had to eat, right?”
2) The program is supposed to help stimulate the economy by getting people to buy new cars. Even those who see through the environmental argument often agree that it has succeeded in that purpose. And I don’t disagree, but let’s look at the issue more closely.
First, let’s start with the basics: Every dollar that the government spends is a dollar out of the pockets of a tax-payer. That should be obvious, but it seems that we sometimes forget this basic fact, maybe because we don’t see our tax bill increase at the passage of these sorts of programs. But it is true, whether the money comes from tax-dollars directly, or is borrowed (and therefore will be paid by future generations of tax-payers), or is printed (which we pay for because of the inherent devaluation of existing currency). There is no escaping the fact that there is no such thing as free money.
With this is mind, can this program be considered as anything more than taking money away from people who don’t want to buy a new car, and giving it to someone who does? The government is essentially telling you, “If you aren’t going to buy a new car, we’ll take your money and give it to someone who will.” By doing this, the government subverts the dichotomy that, during a recession, it is in each individual’s best interest to save money, but it is in the economy’s interest that we spend. I don’t blame the government for attempting to find ways to stimulate the economy during a recession, but giving people the choice of spending money or losing it is beyond over-reach.
So we must ask ourself this question: is it more important to (slightly and artificially) stimulate a sector of the economy for a very short period of time, or is it more important to respect our freedom to save or spend our money as we please? Maybe some in congress may disagree, but it seems to me that the answer to that question is obvious.
Paul Krugman vs. Paul Curtman
Paul Krugman, nobel prize winning economist, says that the people protesting at health care town hall meetings are anti-American and amount to a mob.
Tell that to Paul Curtman:
Our country was founded on freedom, not politeness.
For those who might be tempted to brush off his criticism, please read The Federalist #41, written by James Madison, known as the Father of the Constitution.
The Limits of Freedom

As my state considers a state-wide smoking ban in restaurants, bars, and the like, I’ve been considering when it is appropriate to restrict freedom. I don’t smoke, and I don’t particularly like second-hand smoke either, so it’s very tempting to me to stay on the sidelines. After all, it’s not my choices that are being restricted.
But I also am reminded of the fact that we live in the “land of the free”. What exactly does that mean? In this country, we take freedom very seriously. Let’s start with what I hope everyone can agree on: Freedom is not limited by what the majority feels is the right thing to do. It is a contradiction to say, “Yes, we are free in this country, so long as you do use your freedom to choose good things and not things we think are stupid.” The point of the right to “freedom” is that we have a right to make our own choices, even if others would view them as poor choices. Anything less is not truly freedom.
However, there are also times when our freedom is, and should be, restricted. I cannot do anything I want and defend my actions by saying, “It’s a free country, ain’t it?” I can’t steal something that doesn’t belong to me, or yell “fire” in a crowded movie theater. So there are limitations to my freedom, and rightly so.
So, as I contemplate the pending smoking ban, and my own apathy towards it, I’m prompted to consider the question: when it is OK for my freedom to be restricted? The default position should be that my freedom should not be restricted, and the burden is on those who wish to restrict freedom to argue that it is worth it.
There are two arguments for why a particular choice should be restricted. The first may be obvious, although I think it has some subtleties. The second is less obvious.
1) My freedom to do something may be restricted when that choice is harmful to other people who are not willingly participating. The harm may come upon them directly or indirectly (I don’t understand why some people argue that indirect harm is any less valid than direct harm.) However, the question should also be asked: can the harm on other person be avoided by some other means that doesn’t restrict the freedom of either party?
2) My freedom to do something may be restricted if the decision is too complex for the common person to make it on their own. That’s a statement that most freedom-loving people would scoff at, but I hope you consider it carefully. Do you oppose regulation that says that poison should not be put in cereal? What if companies could do it without even indicating it on the label? If we consider only #1 above, one could argue that the companies are free to do so, because those who buy the cereal are willingly participating in the consumption of that cereal. Consumers are free to abstain. However, clearly this is going too far. We accept the fact that our government protects us from our own ignorance at times. It would be impractical for everyone to be an expert in every field so that we can make good decisions in all aspects of our life. I don’t have the expertise or equipment to test the breakfast cereal that I buy for poisons, so I trust the FDA will do it’s job and restrict food companies from putting such things in my food. I also trust that the government will ensure the safety of the planes that I board, because I am incapable of doing so myself. So I want the government to restrict the airlines from choosing to neglect passenger safety.
So, returning to the smoking ban, we must first define which freedom we are restricting (and, to be clear, every law can be defined as a restriction of freedom). In this case, the freedom being restricting is the freedom of business owners to determine whether smoking will be allowed in their business. As much as I like eating in smoke-free restaurants, I have to say that I can’t justify the restriction of that freedom, based on the criteria above.
For one thing, no one is forced to enter the business, and therefore no one is harmed except for those who willingly participate. Clearly, customers are not forced to enter a particular business. And even employees can choose to quit. One might argue that the right of the employee to choose where they will work is being infringed. However, that right doesn’t really exist. A person does not have the right to choose any workplace and determine the conditions of their employment. The employer decides who is hired and who is not, and the employer also has the right to set the conditions of employment. That’s not to say that the employer holds all of the cards. If an employee does not like the working conditions, the employee can choose the leave. If enough other employees follow, this can cause problems for the employer as well. The employer will have to look harder and pay more to find people willing to work in sub-par conditions.
Secondly, the decision to smoke or not to smoke, or to frequent a business that caters to smokers, is not too complex for the average consumer. There is no need for the government to protect us from our ignorance, since the negative health effects of smoking are well-known.
And yet, the smoking ban will likely pass without much challenge. So, am I missing another key reason why freedoms can and should be restricted? I’m not opposed to seat-belt laws, but that also doesn’t qualify under either of the conditions mentioned above. So, is there another condition I am missing? Or should we be accept a government that restricts our freedom to make bad choices?


