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Thursday, December 29, 2005

Market Power and Health Care Prices

Ezra Klein on health care costs:

Pay More, Get Less, by Ezra Klein, Tapped: A fair number of libertarian and conservative economists tend to claim that the high costs of care in America are a simple result of how much we pay for services. They, predictably, ascribe the impressive sums to the awesome technologies and complicated operations we deploy, a quality of care apparently inconceivable in any other country. But it's more structural than that. In their (damn good) paper on the variance between U.S. health spending and costs in other countries, Uwe Reinhardt, Peter Hussey, and Gerard Anderson explain:

Distribution of market power and prices. In a previous paper we argued that Americans pay much higher prices for the same health services than citizens in other countries pay. There are a number of reasons why this might be so.

First, the distribution of compensation in the United States is wider than in most of the other industrialized countries. The highly trained and highly talented health professionals employed in health care must be recruited from the same talent pool used by other industries offering high compensation, such as law and finance. Because health care is a labor-intensive industry, labor is one factor driving up the cost of producing health care in the United States.

Second, the highly fragmented organization of the financing of health care in the United States serves to allocate relatively greater market power to the supply side of the health system than to the demand side. As we have argued in previous papers, multiple purchasers of care allow U.S. prices to rise above the level attained in other industrialized countries that either endow the demand side of their health systems with strong, monopsonistic (single-buyer) market power (such as the Canadian provincial health plans) or allow multipayer systems to bargain collectively with the providers of health care, sometimes within government-set overall health care budgets (as, for example, in Germany).

So our system, due to the weird structural incentives and glorification of the supply-side, is inherently more expensive. But that doesn't prove we don't use more services and better technologies. For that, you turn to "It's The Prices, Stupid," written by the same team of researchers:

A study by the McKinsey Global Institute followed that more in-depth approach. The research team, which was advised by a number of prominent health economists, based its analysis on four tracer diseases: diabetes, cholelithiasis (gall stones), breast cancer, and lung cancer.31 Using PPP-adjusted U.S. dollars as the common yardstick, the McKinsey researchers found that in the study year of 1990 Americans spent about $1,000 (66 percent) more per capita on health care than Germans did. The researchers estimated that Americans paid 40 percent more per capita than Germans did but received 15 percent fewer real health care resources. A similar comparison revealed that the U.S. system used about 30 percent more inputs per capita than was used in the British system and spent about 75 percent more per capita on higher prices.

So, when tracking the utilization of resources for a variety of treatment-intensive diseases, we spend more and receive less than residents of other countries. It's not that we're offering more or better treatment, but that our "medical-industrial complex" charges exorbitantly for the same treatments available elsewhere.

    Posted by on Thursday, December 29, 2005 at 03:20 PM in Economics, Health Care, Market Failure | Permalink  TrackBack (0)  Comments (12)


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