The Real Cause of Our Health Care Problems (Or: How Bureaucrats Destroy Industries)

Steven Brill just published a long article called Bitter Pill: Why Medical Bills Are Killing Us.  It’s a good article and worth reading, despite being far too long at 11 pages.  There’s so much repetition that it probably could have been 5 pages instead, and it’d be a better piece for it.

It’s surprising to me, though, that the author fails to identify (or at least, fails to state) what is the clear cause of the outrageously expensive medical bills that he details in the article’s several anecdotes.

He spends a lot of time pointing out exactly how much profit is being accumulated by many "non-profit" hospitals, and how much they are paying to their executives and administrators.  It’s the same as the situation with "non-profit" colleges and universities: the term non-profit is purely a marketing term, and a deceptive one at that, since hospitals, colleges, and universities are among the richest organizations in the country.  They are making tons of profit -- tens of millions of dollars per year in many cases -- they just aren’t structured in a way that it gets distributed to shareholders.

The problem is that medical bills are insanely inflated, and the implication seems to be that the cause is these rich fatcats running the hospitals -- or at the very least, those rich fatcats are evil even if they aren’t actually the cause.

The author correctly identifies chargemaster prices as part of the problem.  He gives many examples of chargemaster highway robbery, such as pills or alcohol wipes that cost several dollars each in the hospital even though their actual price in the free market is pennies each.  And he recounts how administrator after administrator was unable to explain to him exactly where the chargemaster prices come from or why they’re so high.

He also goes into detail about Medicare and private insurance and their strengths and weaknesses, including how a lot of insurance is limited to a few thousand dollars of coverage while medical bills routinely reach tens of thousands, even hundreds of thousands.

Despite all the good reporting and detail provided on these many aspects of our health care system, nowhere does the author state the simple economic fact that is at the root of the problem: the decoupling of the customer from the payment.  In other words, the person receiving the service is not the person who pays the bill.

Whenever you insert a third party between a buyer and a seller, whether that third party is an insurer or the government, the result is an interruption of the price signal and a distortion of the market.  In many cases this leads to a bubble, as we’ve seen in housing and higher education.  When "someone else" is paying the bill, the buyer has no incentive to care about the price, which means that the seller -- whose goal is profit, after all -- will raise prices.

So when the government pumps billions of dollars into the housing market to "make housing affordable", the actual result is that prices skyrocket until the market is destroyed.  When the government pumps billions of dollars into higher ed to "make college affordable", the actual result is, again, skyrocketing prices as the bubble inflates.  And "making health care affordable", as Obamacare purports to do, by making it "free" for many people, outlawing copays, etc, will again in fact cause the opposite to occur: it will get more expensive.

There are many problems in the U.S. health care system, but none are more important or more fundamental than this one.  Hospitals, drug companies, and medical device makers can only charge outrageous prices because patients don’t pay them directly.  Further decoupling the patients from the prices will exacerbate the problem, not solve it.

The failure of politicians to understand this most basic economic principle has led to massive damage and suffering in our health care, housing, and education markets.