Economics / International Business

Why is Health Care So Expensive?

As New Year approaches, people shopping on to Healthcare.gov for their 2016 health insurance plans found double-digit inflation in premiums across the board, while those who tried to switch to cheaper plans were forced to accept heavy deductibles and weaker coverage. This combination of higher premiums and larger out-of-pocket costs left many Americans wondering whether the Affordable Care Act is still “affordable”. According to a report from the Kaiser Family Foundation, “only 32% of households with incomes between 100% and 250% of poverty can meet the lower deductible amounts.” Insurers claim that the spike in premiums were caused by the increase of customers with pre-existing conditions, whose enrollment they’re not allowed to reject under the Affordable Care Act (ACA).

Taking advantage of the brewing public discontent over expensive premiums, opponents of the health care act will jump on the opportunity to attack the law in the upcoming elections. Yet as politicians fight over the ACA, no one seems to realize that premiums are a reflection of the underlying costs and risks of its coverage. When medical care is unbearably expensive for the average consumer, regardless of how policies distribute the price burden, universal healthcare cannot be both affordable and sustainable. The U.S. doubles the OECD average health expenditure per capita, but often underperforms compared to other developed countries, despite being the largest spender by far.

One reason for the abnormally costly health care is the lack of price transparency. Only five states scored passing marks on the price transparency test from Health Care Incentives Improvement Institute’s report this year. Higher prices are not necessarily related to the quality of care, but without transparency, consumers cannot make informed comparisons. Price opacity allows providers to avoid competition and set prices higher than they would in a transparent market where consumers can easily switch to cheaper alternatives. Yet because the majority of Americans have been paying for care through insurance, there has been little incentive to acquire pricing information, until the recent spike in insurance deductibles.

An OECD study on foreign-to-Canadian drug price ratios indicate that U.S. branded drugs are on average 2.49 times more expensive than branded drugs in Canada. This disparity is enabled by anti-competitive legislation passed by congress due to pharmaceutical industry lobbying. In the U.S., the Medicare Part D Program prevents the government from negotiating drug prices with pharmaceutical companies, an action that can save at least $10 billion in Medicare costs annually, while the Prescription Drug Marketing Act of 1987 prohibits the importation of drugs from other countries, protecting domestic pharmaceutical companies from competition against cheaper medicine from abroad. Patents grant pharmaceutical companies near-monopolistic power over pricing and availability. Drugs like Solvadi for Hepatitis C costs up to $1000 per pill, $84,000 for the full treatment while costing the producer only $150 per person. Companies justify their exorbitant prices by citing the “innovation crisis”, claiming that developing such drugs requires taking huge risks and without patents there would no incentives for innovation. However, the “innovation crisis” seems to be a myth as reports suggest that the rate of drug innovation has stayed constant over the past decades. If universal health care is to be sustainable, lawmakers must rein in the monopolistic power that pharmaceutical companies hold over consumers, but that is not an easy task. The pharmaceutical industry spent $178 million on lobbying congress in 2015 alone, $60 million more than the second most-heavily lobbied industry, insurance. With over 12 million workers spread across every state, politicians who have the audacity to challenge the industry will likely find themselves crushed by bi-partisan mobs of lobbyists and health care employees.

In hospitals, fear of malpractice lawsuits has driven doctors to practice “defensive medicine” – ordering extra products, tests and procedures for patients to minimize legal liability. According to Marty Makary, M.D., M.P.H, an associate professor at the Johns Hopkins University School of Medicine, “It is not the [malpractice] payouts that are bankrupting the system — it’s the fear of them.” A study conducted by the Harvard School of Public Health estimated that the elimination of redundant testing in hospitals in 2004 would have saved $8.2 billion, an amount that’s likely to have increased substantially today considering the growth of health expenditure over the past 11 years. To cut costs and reduce wastage in the health care system, regulatory agencies must be given the power and resources to monitor and punish redundant procedures in hospitals, while legal reforms for malpractice must be introduced to reduce the doctors’ needs for defensive medicine.

At the current rate of increase in health insurance premiums and out-of-pocket costs, it won’t be long before the Affordable Care Act alienates its biggest cost-bearers, working, healthy Americans. Yet repealing the act won’t make the situation any better – the U.S. will return to pre-ACA uninsured rates of up to 18%, a staggering lack of health care for a developed nation. As long as the health care industry remains in its current condition, there can only be lose-lose situations as the baby boomer generation retires. For the sake of everyone’s health and bank accounts, it’s time that consumers do some lobbying of their own.

Michael Cao

References

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Center for Responsive Politics. (n.d.). Lobbying Spending Database. Retrieved from Open Secrets: https://www.opensecrets.org/lobby/top.php?showYear=2015&indexType=i

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Louise Radnofsky, P. O. (2015, November 19). Rising Rates Pose Challenge to Health Law. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/rising-rates-pose-challenge-to-health-law-1447894371?alg=y

Louise Radnofsky, S. A. (2015, August 27). Insurers Win Big Health-Rate Increases. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/insurers-win-big-health-rate-increases-1440628848?alg=y

Stephanie Desmon, H. J. (2013, May 1). ‘Catastrophic’ Malpractice Payouts Add Little To Health Care’s Rising Costs. Retrieved from Johns Hopkins Medicine.

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Walker, J. (2015, April 8). Gilead’s $1,000 Pill Is Hard for States to Swallow. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/gileads-1-000-hep-c-pill-is-hard-for-states-to-swallow-1428525426?alg=y

 

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