Why is Health Care So Expensive?

Because health care costs have been increasing faster than other costs for a long time. Everyone knows that. But why is that happening? Not so clear. This excellent article (via Marginal Revolution) says that health care is not subject to the same pressures as industries where costs have come down. Off-shore manufacturing is one such pressure. For example, a cell phone used in California can easily be made in China. In contrast, the health care a person in California is likely to want (e.g., X-rays, check-ups) must be supplied locally.

Let me suggest other reasons:

1. A large fraction of medical school professors are co-opted by industry. They get lots of money from health care companies. The companies have no interest in cutting costs. They fund research by medical school professors for exactly one reason: to sell more product.

2. The average medical school professor has little idea how to do research. Recently I mentioned a study in which they threw away half of their data. An article about the Potti scandal revealed that Potti’s main co-author, Dr. Nevins, essentially confessed he didn’t understand the research in the papers he had co-authored with Potti. As far as I can tell, medical school professors usually know so little statistics they cannot analyze the data from the studies they do. If you don’t understand how to do research, innovation will be difficult.

But I think the bigger and less obvious reasons are these:

3. The health-care supply chain is long. Some medical school professors can innovate — Peter Provonost, for example. But they face a special problem: the enormous health-care supply chain. It includes doctors, nurses, hospital workers, drug company employees, health insurance employees, medical equipment manufacturers, alternative medicine practitioners, psychotherapists, X-ray techs, health food store employees, and on and on. No other industry is like this. No one in the supply chain can innovate, yet all of them can block innovation. Everyone in the health-care supply chain must be paid. They care enormously about being paid. They hate to take a pay cut. Any innovation — unless it increases the cost of health care — threatens their paycheck. So there is a huge bias in favor of change that increases cost and a huge bias against change that decreases costs.

4. Let them get sick. If a man is not afraid, you cannot sell him protection. This is why protection rackets have two parts: (a) threat followed by (b) offer of (expensive) protection. Modern health care workers understand a similar truth: If a person is not sick, you cannot sell him (expensive) health care. Modern health care workers do not actively make people sick, they let a dysfunctional research system do that. (E.g., cluelessness about how to stimulate the immune system.) Then they pounce — and the money starts to flow. Once the money starts flowing, political power builds up. In a sane world, schools of public health, which care about prevention, would receive vastly more money than medical schools, which ignore prevention. In fact, the opposite is true.

This is why personal science will be so important: It is a way around our massively-dysfunctional health-care system — dysfunctional, that is, for everyone outside it.


22 Replies to “Why is Health Care So Expensive?”

  1. I work in health care, and the main reason for outrageous profit margins is because health care is heavily subsidized and supported by the government: about a third of the work force works for the state now, and their benefits are 400% times those of the private sector, which usually includes the most expensive health care plans. The government gets them because, hey, it’s other peoples money, so they can just spend more by raising taxes or firing up the printing presses.

    The government also mandates coverage in many cases such as medicare and medicaid, and heavily encourages companies to provide insurance. With so many people covered doctors can fill their practice with only insured patients. At which point no market controls exist, and the sensible thing to do is just make up as high of charges as you want.

    Sure, the insure companies could try and police the doctors, but it’s easier to just raise premiums. The really high margins plans are the ones held by the government anyway, and they have bottomless pockets since, as I said before, they can just steal money from the public through taxation or inflation. Just screw over the taxpayers and everyone in the private sector.

    Why do we health care practitioners charge so much? Because we can and there are no market forces to stop us, no incentives to not gouge.

    Insurance also acts as a moat, insulating bad practice and keeping competition away, because patients will be reluctant to seek alternative treatment that they have to pay out of pocket when they can see their doctor and have the insurance cover it.

    As an example of price inflation: a 90 minute massages market price around where I live is about $90. When charged to the government though as manual therapy and neuromuscalar reeducation I’ve seen the same treatments get paid out for over 300% more.

    Elites will use their position at the top to manipulate the laws and the social structure to accrue benefits to themselves at the expense of others. The solution would be to restore a real market economy to health care. Ban all automatic health insurance; no government plans, no employee plans; the only health insurance should be that which individuals buy of their own will from the private market.

    If doctors could no longer depend on having practices full of insurances patients subsidized by the government prices would come crashing down to reasonable market level.

    1. Zetji, I agree with your analysis. I just think it is incomplete. All the downward pressure on prices in the world will not produce innovation. Our current system is based on an inherently expensive idea (first, let people get sick).

  2. Their is the Hanson theory that healthcare is expensive for the same reason engagement rings are. the puropose of healthcare is not to make people better but to show how much we care

    “our ancestors showed loyalty by taking care of sick allies, and that, for such signals, how much one spends matters more than how effective is the care, and commonly-observed clues of quality matter more than private clues. So today we spend enough to distinguish ourselves from people who don’t care as much as we do, and we pay little attention to private clues about the health effectiveness of medicine”


  3. Long ago I had a tenuous connection with medical research. A statistician told me that medics would rather be taught Statistics by a fellow medic than by any statistician. At most they’d learn a few, probably misunderstood, statistical recipes.

  4. Seth,

    Great answer…wrong question.

    Medical care is expensive for 2 main and 1 subsidiary reason.

    1. Supply restriction. An emt can do 50% of he useful work of a doc…with 6 months training. India has 4 year degre doctors. FDA limits drug entry massively and ptent law limits supply of existing drugs. High regulation.
    2. First dollar insurance as encouraged by US tax law…as compared to singaporean catastrophic insurance with HSAs.

    Unclear benefits. Given other peoples money (lack of alignment between beneficiary, payer & decider roles)…the incentive to find what works is weak.

    1. Araetae, an ounce of prevention isn’t just worth a pound of cure, it costs a thousand times less. There is a “supply restriction” on prevention. Eliminating it — figuring out how to prevent major diseases — would reduce health care costs by a huge factor. People would die eventually, yes, but they would contribute more to other people’s health (via taxes and caring for children) and have more money to spend on their own health (due to savings) before doing so. What is the “wrong question” I have asked?

  5. Zetji says: “the main reason for outrageous profit margins is because health care is heavily subsidized and supported by the government.”

    If that’s true, why do so many countries where health care is FULLY subsidized by the government have such affordable health care compared to us? If the solution is to “restore a real market economy,” why do the countries with the least exposure to market forces consistently provide the best care for the most people?

    I think it’s worth at least entertaining the idea that obscene profit margins are driven by a capitalist (i.e., profit-taking) system. I dunno. Just a thought.

  6. Paul,

    I always have to respond to comments such as yours. One of the greatest fallacies of our current healthcare debate is the assumption that our current health care system resembles anything close to a free-market. Our current National Healthcare System differs from it’s foreign counterparts only in it’s inability to offer universal access. It is subject to the same absurd barriers to entry that have stifled progress in everything from food costs to energy efficiency. The system is SO massive and convoluted that it really knocks me on my face when people such as yourself assert such claims.

    The counter question to yours now is given that free markets have worked so well at effectively distributing everything from diapers to cellphone. Making life changing technology available to even the poorest sections of the planet. Why are people so afraid to let our most valuable resources, food and healthcare, be controlled by those same mechanisms.

  7. Matt McCandless: “The system is SO massive and convoluted that it really knocks me on my face when people such as yourself assert such claims.”

    In fact I made no claim of any kind anywhere in my post. I posed a couple of questions, then offered the opinion that a particular idea—the idea that profit-taking itself could be the culprit—was worth considering.

    However, your claim—“Our current National Healthcare System differs from it’s foreign counterparts only in it’s inability to offer universal access”—is not a factual statement. Our current system differs dramatically from its foreign counterparts in that it is (1) overpriced and (2) grossly inefficient in every area EXCEPT that of delivering profits to investors in the insurance and drug industries as well as the beneficiaries of profiteering hospitals and HMOs (their ostensible for- or non-profit status notwithstanding).

  8. Excuse me, I assumed your last statement, “I think it’s worth at least entertaining the idea that obscene profit margins are driven by a capitalist (i.e., profit-taking) system. I dunno. Just a thought.”, as a passive assertion. I am still not convinced I was wrong but I will give you the benefit of the doubt.

    Given my new interpretation of your statement I would say, No, it is not worth considering. To offer something up as a culprit in a crime assumes that that something exists. In this case there is not Capitalist Health System to scape goat. Capitalism implies choice, our current system offers none. Everything from diagnosis to acceptable treatments to prevention are dictated by a series of committees and enforced under the penalty of law. What we have in America much more closely resembles socialism than capitalism and that was my point.

    It is the underdog nature of you comment that really prompted me to comment though. As if no one as yet thought profits could be at the core of the current crisis. When in reality you would be hard press to find a New York Times article that does not cite capitalism as the main culprit of our current situation. Why target capitalism you might ask? Because it is the only real threat to their current monopoly. Regulation, socialization, these are things that can be manipulated through politics. Free choice and open competition cannot.

  9. On a separate note though, it is hard not to notice that the three areas that The Atlantic cites as becoming more expensive, “beds, meds, and higher-ed” are the three most regulated areas of our economy. So I guess where Seth might say this is because they are not open to the same types of innovation that other areas such as electronics may be open to. I would say we to not see those types of innovation in those fields because our economy is not open to them.

  10. Matt McCandless: “Capitalism implies choice”—how so? You could say it rewards innovation, but (1) that doesn’t mean “choice” is implicit and (2) it rewards it via buyout, i.e. assimilation, and tends toward the “Mac & PC” duopolistic parody of choice that lies at the end of the capitalist road in every sector. The triumph of the capitalist has always involved the elimination of real choice. This has always been true, from Big Auto tearing up trolley tracks to Big Pharma writing the health care bill. What you see as anti-business regulation actually benefits big business, and the important point is that someone’s pockets are lined in the process. Someone is getting rich off the status quo. And I would venture to suspect that you’ve been trained not to view that someone as a Capitalist, although he is the quintessential Capitalist; he is the very definition of a Capitalist. The objectivist-libertarian-Austrian ideology talks up a storm about “capitalism” while hardly whispering a word about Capital. But it is Capital that frantically seeks returns even when it has all the money; it is Capital that bribes policians to create huge barriers to entry; it was Capital that wrote Romneycare and Obamacare and it will be Capital that thwarts any of your efforts at a return to small-market logic, or at least any meaningful elements thereof.

    “[Y]ou would be hard press to find a New York Times article that does not cite capitalism as the main culprit of our current situation.” If you can find, and link to, a Times article that actually asks “cui bono,” as I did, I’ll be greatly surprised. (What you don’t seem to grasp is that I wasn’t attacking “free choice and open competition”; I was asking “cui bono.”)

    Matt says: “What we have in America much more closely resembles socialism than capitalism and that was my point.” And my point was this: If that were true, it would follow that countries that more fully embrace a Socialist model would have even worse problems. And instead the opposite is the case. In case after case after case.

  11. In order to reward innovation there must be a choice? Or else it is just giving things to people. It is natural in any competitive process that you will eventually whittle down to two or three choices. No one is going to buy the fifth best operating system, it is a feature not a flaw. Market share does not insulate firms from competition or restrict choice.

    I believe it is you who has been trained, to see any move toward ones best interest as necessarily destructive or immoral. Your “Quintessential Capitalist” is not necessarily a capitalist at all, in reality he could be a pacifist, he could be an anarchist, he could even be a baker. What you have described is an immoral human being and he can just as easily fit into one mold as the next.

    I believe that most socialist healthcare systems, to the extent that they have worked, have done so by successfully pitting the medical establishment against it’s political overlords. A politician may be elected in a single payer system based on his ability to control healthcare costs by directly intervening in the market, and because he is subject only to his constituency he is free to pursue those ends. In America we still retain a belief that we have a free healthcare market and in the past have not generally voted for politicians who claimed they would directly intrude into healthcare the way a European Politician might. It is hostile to our fantasy. In this system it is the medical establishment that comes out as the big winner as they are able to secure all of the monopolistic powers befitting a social enterprise without any of the downward pressure from their political counterparts. You can see how in this best of both worlds scenario it is the people who lose. A step either direction on the spectrum of choice would most likely result in a much more optimal outcome for the average consumer. But when in doubt most libertarians will repeat the mantra, “freedom is it’s own end”.

    I think the problem with anti-capital arguments is the belief that capital is only present in a capitalist society. The question for an economy is not whether or not capital should or should not exist or make returns, but rather, who should get those returns and how much should those returns be. In any socialist system there is still “capital” but instead of being allocated through a system of prices, it is allocated through a system of bureaucrats. Ideas are not priced according to their market value but rather their political appeal. This is in stark contrast to true capitalism where ideas are disseminated, not based on their appeal to a political faction, but rather by there ability to satisfy the needs of enough individuals to secure a return on the initial investment. I would argue that contemporary capitalism implies the lack of an over arching control structure, and that it is that structure, not the capital that it controls that defines socialism.

    So in closing, yes, it is humans ever present quest for capital return that lures them to lobby politicians for handouts, but it is a societies susceptibility to those efforts that places it somewhere on the spectrum of Capitalist/Socialist. I think George Will said it best in his interview on econtalk, as the state attains a greater and greater ability to influence the profitability of enterprise it follows naturally that enterprise will spend a greater and greater amount of time trying to influence the state. I guess I would leave up to you to decide how to best address that problem.

  12. No offense, but as I am already familiar with the libertarian catechism to the extent that it bores me to tears, I’ll just cut to the part that’s relevant to the current discussion:

    “In this system it is the medical establishment that comes out as the big winner as they are able to secure all of the monopolistic powers befitting a social enterprise without any of the downward pressure from their political counterparts.”

    Interesting. Who, specifically, within “the medical establishment” is “the big winner”?

  13. Paul asks “Who, specifically, within “the medical establishment” is “the big winner”?”

    Answer: Everyone who has a stake in the supply chain. This includes “doctors, nurses, hospital workers, drug company employees, health insurance employees, medical equipment manufacturers, alternative medicine practitioners, psychotherapists, X-ray techs, health food store employees, and on and on”, academic professors and researchers, union leaders, hospital and clinic administrators, and even [currently in our system setup] politicians and beaureucrats.

    So, who are the losers? Everyone else, particularly the tax payer and patient (customer).

    To head off the discussion that many of the winners also fall into the losers group… I’ll pay 20% more for my industry services and in fact cheer on cost/price increases if that means I get a 50% raise myself!

  14. Maybe average consumer shopping in the insurance marketplace needs more transparency and product education? If you wouldn’t sign a mortgage without checking your credit report, why do some many people pay for insurance policies without verifying their medical report? In fact, many consumers and even many insurance agents are unaware that Humana, UnitedHealth Group, Aetna (AET), Blue Cross plans, and other insurance giants have ready access to applicants’ prescription histories.

    An investigation in 2008 by the Federal Trade Commission found that the two companies supplying these pharmacy profiles—MedPoint and IntelliScript—violated federal law for years by keeping the system hidden from consumers. The FTC has now required disclosure of personal medical and prescription files. MedPoint and IntelliScript say they are now fully complying with the FTC’s order.

    Yet, 2/3 of all health insurers are using prescription data—not only to deny coverage to individuals and families but also to charge some customers higher premiums or exclude certain medical conditions from policies, according to agents and others in the industry. Some carriers are also using the data to charge small employers higher group rates. Separately, some 20% of life insurance companies are relying on prescription histories when reviewing applications, according to experts in that business.


    Unfortunately, failing to check your medical report can be costly; errors or omissions within individual medical report files can cause applicants to be rejected outright, pay higher policy premiums, or suffer outright rescission of coverage! For example, the Consumer Reports Health Blog discusses how insurance can be denied because a medical coding error in your medical report file in the MIB Group Inc. databases.


    Few people realize the MIB Group has a file on them. Like the credit-reporting agencies, MIB monitors virtually every aspect of a person’s health care. When someone applies for individual health-care coverage, the application is routinely run through MIB’s huge database of health and medical information. Insurers effectively use the MIB data for health-insurance applicants like they use motor-vehicle administration records for auto-insurance applicants, adjusting premiums or even denying coverage based wholly or in part on what is in a person’s MIB file.

    All health insurance applicants and policyholders should request an annual copy of their “medical report” files from the three major specialty nationwide consumer reporting agencies to ensure they aren’t overpaying for insurance or in danger of policy rejection or rescission for reported pre-existing conditions.

  15. While I would never claim to understand the issue entirely. It would seem that the “Big Winners” would actually be a conglomerate of, (in no particular order)

    1. Medical Lobbyists, who are able to secure a nice paycheck by greasing wheels of the establishment and help their own accent into it’s ranks.

    2. Doctors, who are able to charge substantially inflated prices due to the protected nature of their field and there access to consumers who have no real choice in service or price thanks to “Cost Control Mechanisms”. The icing on the cake and where all social ideas eventually break down is that they are not spending their own money so there is no incentive to make a good decision.

    3. Politicians, who are able to secure donations and support by giving the whole process the federal stamp of approval.

    4. Regulatory agencies such as the FDA, who are able to intervene in markets and hence enjoy a level of power that should exist no where in a free society.

    5. Insurance Companies, who, while potentially paying more in benefits, are able to recoup that cost by creating barriers to entry that would not be possible without the explicit support of all other players.

    I am sure we could think of more but I think the point is clear, this is not a capitalist system, in any honest interpretation of the word.

  16. OK, this is what I find astonishing. I see this again and again, yet it never fails to amaze me. Every single champion of “capitalism” on the Internet is the same: they have utterly NO IDEA, not a CLUE, how capitalism actually works. They can analyze a profiteering situation and not even wonder where the profits go. They can witness skyrocketing prices and a simultaneous boom in the wealth of the investing class without ever connecting the dots. They can even refer to lobbyists and bribed politicians without, apparently, wondering on whose behalf the lobbyists lobby and from whose largesse the pols are bribed.

    Matt, who do you think pays the lobbyists? Who do you think benefits from the status quo enough to take the trouble to “contribute” to so many key candidates’ war chests?

    I’ll give you a hint: it’s not doctors. Doctors haven’t prospered as medical costs have risen out of control. On the contrary, their incomes have declined. http://www.marketwatch.com/story/primary-care-doctors-income-drop-may-lead-to-shortage-study

    As for the FDA, its budget and staff has been steadily cut since the Reagan administration. I don’t see how it could be construed as a “winner.” Maybe it “wins” every time it approves a drug that’s actually harmful, because Merck or whoever pays them off? But then that’s a case of Merck’s investors (i.e., Capitalists) greasing the necessary wheels en route to massive profits.

    Over the past few decades we’ve had a boom in private hospitals and private HMOs. At the same time, reports of profiteering by “non-profit” hospitals are rampant and some have undergone restructuring efforts administered by investment banks. Over the same period, pharmaceutical co.s have become the most widely held stocks on the NYSE, and insurance companies have reported record profits. AND costs are rising uncontrollably, while doctors’ pay declines. The writing is on the wall. Big investors are making out like bandits.

    Or, to use old fashioned terminology, Labor’s pay declines while Capital pockets record profits. And contrary to your assertion, this is exactly what Capitalism is. It’s just not how Capitalism has been (mis)represented to you.

  17. Responding finally…

    Supply restriction prevents the folks who could make money by selling the prevention from doing so…and especially for advertising the results (See: baby aspirin + Heart Disease). Who is allowed to make money from prevention? Not many, as the FDA is now cracking down on supplement manufacturers?

    First Dollar insurance + sick days insulates consumers from the immediate costs of their health behavior.

    The incentives to solve the health problem are broken…so it’s not being solved. As far as I’ve seen, every industry that gets the incentives right, even in medicine (plastic surgery, lasik, etc.), has hugely decreased and still decreasing costs.

    As to wrong questions:

    I think you answered the question of how the medical industry responded to massive levels of protectionism…not the question of why the costs are high.

    I’d look at Kaiser Health Care, or Singapore or Germany before concluding that the problem is insufficient prevention..

  18. I just stumbled upon your blog and wanted to say that I have really enjoyed browsing your blog posts. In any case I’ll be subscribing to your feed and I hope you write again soon!

  19. on the 90’s the minimum wage was $ 4.25/hour, a full coverage individual health insurance policy $ 75.00 (I mean full without so many co-pays)

    2011 the minimum wage is $ 7.50/hour, a (full coverage?) individual health insurance policy is = over $ 700.00

    the difference is that the suppliers, equipment’s etc are manufacturer in China for a “fraction” of the cost…

    It’s getting very close to the point that lots of people will going to drop their health insurance plans and if the USA think that a crisis exist, wait until we got on this point to see what a massive destruction for good means.

    The government need to step up and act right now to audit and cut the health insurance plans costs in at least 50%.

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