The Real Culprit of Medical Care’s Rising Costs

The N&O today publishes a letter I wrote identifying perhaps the major culprit in rising medical costs:

Adam Searing claims that contributing to the rising costs of medical care in this country is the fact that we spend billions on name-brand drugs and pricey new medical devices despite little evidence they work any better than older models (“Pricey medicine and its price,” Oct. 12 Point of View article).

What Searing leaves out is any explanation of why that might be the case. Indeed, it is not we who spend billions on such medical care but third parties, including government programs and insurance companies. We as consumers are severely insulated from paying the full bill thanks to Medicaid, Medicare and insurance co-pays.

Recent estimates suggest that nearly 90 percent of medical costs are paid by a third party. So it is only natural that billions would be spent on pricey drugs and medical devices of questionable benefit compared with older models because the people electing to purchase such goods and services are not actually paying for them.

 Searing’s hope that the recent health reform law will somehow reduce costs is misguided because the major changes in the law only serve to shift even more medical care payments onto third parties by forcing everyone to carry insurance and increasing Medicaid enrollment.

Any real attempt at reigning in the costs of medical care must move away from third-party payments. When someone else is paying, demand becomes inelastic – that is, impervious to price. When demand becomes insatiable, pricing naturally will tend to rise as resources are bid away from other uses and directed toward medical care. Political efforts to curb medical costs can only be achieved by price controls, i.e. setting caps on the reimbursement rates of medical services. Lowered reimbursement rates drive out providers and lower investment in medical technology. Thus we are left with more patients demanding more services from a shrinking pool of providers and equipment.

The only move left at that point to reign in medical care “costs” is to limit what services will be covered, i.e. rationing.

Results would be far superior if reform was consumer-based, removing the tidal wave of government interventions in the market and allowed for more medical care payments be made by the patient at the point of purchase. This would force providers to become much more competitive and efficient and bring down costs.

And if you believe it is the technological advancements of medical care that is responsible for increased costs, look merely to the marketplace for computers, cell phones, flat screen TV’s, etc. All of those products have seen staggering amounts of technological advancements all while becoming more affordable to a greater number of people.