Why Healthcare in the US is So Expensive, and What Can Be Done About It

Healthcare_s640x427The passage of ObamaCare, and the ongoing debate over it, is the culmination of over 80 years of ever-increasing government involvement in the healthcare industry. It is also the culmination of about 50 years of obviously increasing healthcare costs.

The following is a copy of an email that I sent to talk-show host, Bill Handel, on KFI AM 640 radio in the Los Angeles area:

Dear Bill,

You have observed the indisputably bad state of American healthcare, with its poor performance and high, constantly rising costs, and concluded that the USA would be better off embracing a socialized healthcare system more like that of France. You have implied that these are our only two options. But I am sending you this email to let you know that there is a third alternative; one that is vastly superior to the two that you have considered.

The healthcare system in the US, today, is NOT anywhere near a free market. Over the past 80 years, the Federal and state governments have interfered/regulated, (used government compulsion) in the healthcare industry at an ever-increasing scale. In the 1930s and -40s, the Federal government decided to exempt group and employer-provided health care plans from taxation, thus creating a tax incentive for such plans. Over time, with the help of government acts, laws, and union collective bargaining, these plans developed into the type of plans we have today. What we have today, with the support of government, are healthcare plans that act somewhat like insurance, except that this “insurance” is used for just about every common illness, injury, or other health issue. This system of “everyday insurance” insulates the patient from the cost of the treatments he receives. The patient no longer has to make a cost/benefit analysis for treatments, nor be concerned with getting the most value for his money. He simply pays his premium, then gets the most out of the coverage he can. At best, the price/service competition among doctors that keeps their prices in check, is shifted from appealing to patients to appealing to health plan providers. The patient, instead of having hundreds of doctors competing for his continued business each visit, has a few health plan providers competing for his long-term allegiance. It is much more of a hassle to switch health plan providers than to switch doctors, so competition is limited.

But this is not all government agencies do to stifle competition; they also mandate that certain treatments be covered by health plan providers. This further increases the cost of the plan, and reduces the options of patients. The mandates for coverage of certain types of care will naturally come about for a government-promoted system of “everyday insurance.” Insurance works relatively well for catastrophic, emergency cases, because in such cases, the necessity of the coverage is generally clear-cut. But when insurance is expected to cover most day-to-day healthcare expenses, the issue of what is “necessary,” vs. “a good idea,” vs. “unnecessary,” becomes a complex and long-range problem. What the “everyday insurance” should cover, and to what degree, becomes a matter of contention between patient and insurance company. (How’s that for an understatement?)

The HIPAA law (1996) further incentivizes job-based healthcare, and puts a greater burden on healthcare providers, who then transfer the cost to other insured patients.

Medicare, our tax-supported, socialized healthcare system, has, in the past, reimbursed hospitals for “reasonable costs” and doctors for “reasonable and customary” fees. Is it any surprise that “customary” fees went up? The system used for reimbursement today is little better, and distorts the treatment decisions that doctors would otherwise make.

Government spending on Medicare represents 21% of US healthcare expenditure. Adding in Medicaid and other sources of government expenditure brings the total to 46%. (cbo.gov, 2007) So, literally, almost half of the US healthcare system is socialized. (Out-of-pocket expenses for patients are a mere 13%.)

The bureaucratization of health care, resulting from government regulations and the health plan structure, saddles doctors and nurses with massive amounts of paperwork. It de-motivates people from becoming doctors and nurses. People who enter the medical field generally want to treat patients, not fill out endless forms. This decreases the available man-hours of medical professionals and thus increases medical costs. (If the doctor can hire someone to take care of most of the paperwork, this still generates an extra job necessary for the doctor to function, increases the cost of care, and creates a contender for the most boring job in the world.)

Emergency rooms are required by law (EMTALA) to do a formal screening of anyone who comes in for an emergency condition. Anyone who has an emergency condition must, by law, be treated in exactly the same way as anyone else with the same condition, regardless of any indications of their ability to pay. According to the Centers for Medicare & Medicaid Services, 55% of U.S. emergency care now goes uncompensated. This major cost must be shifted to those who can pay, driving up hospitalization costs. (1)

The FDA increases the cost of drugs, while giving the false sense of security of a government stamp of approval. This encourages consumers to be less educated and careful about drugs than they otherwise would be.

[EDIT: Deleted article replaced: Here’s a CATO analysis of why healthcare costs so much: Why Health Care Costs Too Much.]

The impact of unreimbursed care on ER’s: https://www.acep.org/administration/reimbursement/the-impact-of-unreimbursed-care-on-the-emergency-physician/

The FDA causes high drug prices: http://www.kaiserhealthnews.org/Stories/2009/December/29/FDA-approval.aspx

Countries with socialized healthcare systems have the same issue as the US system, in that they insulate patients from the cost of their treatments, and remove the price-reducing, efficiency-increasing effects of competition. They deal with the resulting high costs by setting doctor reimbursement rates in stone and rationing care. The result is a system that is not innovative, not efficient, produces long wait times, and only has more than one option for the rich. As you acknowledged in the case of France, the “better” versions of this system often are not sustainable.

So, what is the solution to the high and rising cost of healthcare in the US? Deregulation to a true free-market system. Let the (relatively) free market that has produced spectacular results in the electronics industry, work in healthcare.

  1. Remove the tax incentives for employers to offer group health plans, instead of equivalent extra wages, and get rid of the regulations that promote the health plan model.
  2. Repeal the EMTALA and let emergency rooms set their own policies on whom, and under what conditions to treat. (People are free to set up voluntary, privately funded, non-profit ER’s that can treat those that can’t pay, and don’t burden those who can pay, or who have insurance.)
  3. Abolish the FDA. (If there is a demand for independent drug testing and approval, there is money to be made in a private “Good Housekeeping Seal” for drugs. Such a company would thrive on its reputation for impartiality and rigor, and would likely make its finances utterly transparent, while charging drug makers a set fee for each drug screening. If it approves something it should have labeled as dangerous, its reputation will be gone, and its business will collapse, quite unlike the government-mandated FDA.)
  4. Phase out Medicare over the next 20 years, and let people save for their own medical needs in old age, rather than paying taxes for the Medicare benefits of current recipients, while hoping that the next generation behind them is able to afford to subsidize their (more expensive) benefits in this perpetual Ponzi scheme. (The same issue exists with Social Security, and Baby Boomers threaten to bankrupt it. Allowing people to save the money they would have paid into Medicare would reward those who save, and encourage saving, while doctors’ competition for seniors’ business would keep prices low.)
  5. Phase out Medicaid over 5 years, and let doctors compete on price for the “low end” market, rather than taking taxes to subsidize dependence on the state. (Those who are genuinely helpless, and can’t pay for low cost care themselves, would depend on the voluntary, private charity that is more forthcoming when others aren’t as burdened with high healthcare costs of their own.)

Compare the rising prices of insured healthcare to the price change of elective procedures. From what I can tell, the average cost of cosmetic surgery has remained relatively constant over recent years, and the cost of Lasik has dropped significantly, due to much improved technology (i.e. free-market innovation.) This provides some indication of what would happen in a truly free market for general healthcare.



For my blog readers, I recommend this book: Capitalist Solutions: A Philosophy of American Moral Dilemmas by Andrew Bernstein


(1) [Note that I’m not saying that it would be a common or accepted practice in a free market to leave critically injured patients to die when they lack insurance or other means to pay. Nobody wants to see other people suffering or dying simply because of an accident. A couple of plausible scenarios for the very poor and uninsured, (no medical card) would be that they would be sent to: 1) a training ER facility, staffed by medical instructors and students, or 2) an ER run by a private charity organization. The lower medical costs in general would make these options much less burdensome than they are now.]


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What Caused the Financial Crisis: It Wasn’t Capitalism or Deregulation

America Before The Entitlement State

The REAL Fiscal Cliff

How to Show That Taxation is Robbery

13 thoughts on “Why Healthcare in the US is So Expensive, and What Can Be Done About It

  1. Pingback: Localista Healthcare vs. Government Healthcare | Localista

  2. The only other thing I might add is that many women are overjoyed that Obamacare covers contraception – yet the free market could give them very affordable (and probably even safer) contraception without hiking up rates on other coverage (which I GUARANTEE will happen if the feds force insurance to cover this basic, common health need!).

  3. Thought-provoking blog post! Since a possible government shut-down is looming in front of us over this issue, it is a very good time to take a look at various solutions and extrapolate some outcomes. I gave a mention to your post and a link in my latest post on Localista. http://shelleyburbank.wordpress.com/2013/09/21/localista-healthcare-vs-government-healthcare/ I honestly do not know what the best course of action regarding healthcare is. It really is too expensive for poor people, and I’d like to believe that in a rich country like the United States, citizens could afford basic healthcare. On the other hand, I don’t believe in socialism as a rule because it stifles individual responsibility, encourages dependence & poor decision-making skills, and discourages innovation. It is a dilemma for me. Looking forward to reading more on this and other topics.

  4. You forgot to mention the enormous cost of doctor’s malpractice insurance, which could be substantially reduced by meaningful tort reform.

    • I definitely agree that this is a factor. But I don’t think that it’s the primary issue and I didn’t mention it so as not to distract from my main points. (The letter was already long enough.)

      It’s also not something that I think can be solved primarily by tort reform. I think what you mainly need to reduce malpractice awards is more rational and just judges and juries. In short, the solution requires cultural change.

  5. Great post, and great blog! Just as I was posting my most recent piece on government coercion in the health insurance industry, I saw that you had followed my blog. I decided to see what yours is all about, and I’m looking forward to reading more of your posts this week.

  6. Healthy young women will see their premiums rise by an average of almost 200 percent under Obamacare, with increases occurring in all 50 states and the District of Columbia, according to a new study. http://insuranceexchangehq.com/aca-medicaid-expansion/

    Well that’s Healthy young taxpaying women who’ll see increases. And it’s to pay for the newly insured non-taxpaying men and women and kids and illegal aliens!

    Still glad you voted for DingleBarry you soccer moms and other females? Now man-up and pay your increases because how else can they implement Socialized Medicine?

  7. Pingback: Reality Check | Mcnorman's Weblog

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