The Sovereign Mind

Free thought on politics and real life

Why Does Health Care Cost So Much in the US?

with 4 comments

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.)

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Written by Mike

November 23, 2009 at 11:23 pm

4 Responses

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  1. […] labor. And the same principles applies to prices of medical supplies and pharmaceuticals, as I’ve described before. The bottom line is that you can’t just take the total spending per capita as a comparison […]

  2. Another reason drugs costs are so high in the US is the cost of advertising them on TV, Radio, newspapers, magazines etc. That is not allowed in any other country. I understand that the cost of advertising is about the same as the cost of the drug – so it doubles the cost here! Another way that it increase the cost is that people see it advertised on TV and ask their doctor for that drug. They may not need it, it may not even be good for them, but if the dr does not give it to them they will go elsewhere! So he does and the result is a cost you

    David Liddle

    February 8, 2011 at 4:02 pm

  3. to continue . . . may not need! This could also be a partial cause of the life expectancy difference, which is lower in the US than in any other civilized country, taking uneeded drugs.

    David Liddle

    February 8, 2011 at 4:05 pm

  4. It’s the FDA which makes all medical equipment cost a fortune by going through a control barrier that limites competition.

    China could build an MRI unit for probably $100,000. In fact, they probably do…

    nugun

    June 29, 2012 at 7:55 am


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