The Real Reason We Pay So Much for Health Care

The high per-unit price of medical services in this country is an open secret, well documented in the health-policy world but largely ignored in the political debate. 

A lengthy New York Times report yesterday detailed just how much more Americans pay for medical services than people in other countries. Often a lot more: almost twice what the Swiss pay for a colonoscopy, three and a half times more than the Dutch for an MRI and five times more than Spaniards for a hip replacement, according to the International Federation of Health Plans.

The high per-unit price of medical services in this country is an open secret, well documented in the health-policy world but largely ignored in the political debate. Rather than rail against high prices, Americans should rail against this: The fixes for those higher prices are clear enough, yet they get almost no consideration from policymakers.

The rash of recent proposals to slow health-care spending have focused on reducing the use of health-care services or shifting those costs to beneficiaries, rather than bringing down per-unit costs. Take the Bowles-Simpson report from December 2010: The largest proposed Medicare savings came from asking the elderly to pay more for their care. Other reports take a similar approach.

And while health-care spending figured prominently in last year's presidential campaign, it took the form of a debate over the proper extent of the government's role. Mitt Romney attacked President Barack Obama for extending health coverage to almost 30 million Americans, on the logic that Washington should spend less on health care by paying for less health care.

How could policymakers do a better job of bringing down per-unit costs? This country is about as likely to adopt a single-payer health care system as it is to adopt the blind mole rat as its national symbol, but that doesn't change the fact that such systems push down costs by negotiating better rates with providers.

Does single payer lead to worse health outcomes? Just the opposite: The U.S. spent almost twice as much as the next highest spender in this 2010 study from the Commonwealth Fund, yet ranked seventh out of seven countries on an index that included quality, access and life expectancy.

If single payer is a nonstarter, what about other, less radical options? One approach is for the government to use its purchasing power through Medicare and Medicaid, which together will account for one in three dollars spent on health care this year, as leverage to negotiate lower prices from insurers, doctors, hospitals and nursing homes. Private insurers would benefit, since Medicare rates often form the basis of their own negotiated rates.

If that sounds familiar, it should: Democrats tried just that with Obamacare, which cut Medicare spending by more than $700 billion over 10 years. Republicans cried murder, and Romney tried to use the cuts against Obama last year. It remains to be seen whether the administration and Congress will maintain those cuts.

A more direct route would be for the government to regulate prices for medical procedures, but leave private insurers responsible for paying those prices. That approach, which Maryland uses for hospitals, could free providers and insurers to compete for customers based on service, rather than devoting their time and energy to negotiations over prices, or to network expansions designed in part to gain leverage for those negotiations.

Of course, arguing about how the government can control per-unit health costs presumes the government has the appetite to pursue such policies in the first place. A good rule of thumb in health care is that everybody's in favor of cutting costs, until somebody makes an actual proposal to cut costs. Until then, we may as well get used to paying more than everyone else.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.