By Leonard Rodberg, Ph.D.

We in PNHP often give the impression that the principal problem with America’s health care system is the extraordinary waste associated with its multi-payer private insurance system. We cite the 15 percent administrative waste that we calculate is due to that insurance system, including not only the marketing and utilization-control costs and the profits reaped by the insurance companies, but also the costs imposed on physicians, hospitals, and other providers by the complexity of the insurance system. (S. Woolhandler, et al, “Costs of Health Administration in the U.S. and Canada,” New England Journal of Medicine 349(8) Sept. 21, 2003.)

However, any comparison of our spending with that of other countries reveals that this must be only part of the story. As a share of GDP, U.S. spending is nearly twice the median of the rest of the industrialized world and 60 percent greater than the next most expensive systems.

Why is this? One conventional answer is that the prices charged by U.S. health care providers are much higher. (See Gerard F. Anderson et al, “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries,” Health Affairs May 2003 22:89-105.) But this doesn’t explain anything; it is simply another way of stating the same observation: Health care costs far more in the United States than in any other country.

The explanation is, in fact, clear, but is seldom pointed out, even by critics such as ourselves. It is a consequence of the fact that the United States is not only the only country that finances health care through market-driven private insurance, but we are also the only country that allows prices to be set through the private marketplace.

It is not only that we pay for health care through a third-party reimbursement system – many countries use third-party reimbursement – but that the rest of the system consists, in essence, of a vast number of independent, entrepreneurial providers of health care services and marketers of pharmaceuticals and medical supplies who are free to set their fees and prices as they see fit.

No other country allows such freewheeling price-setting in its health care system. All use a form of administered prices, even when the actual funding is through multi-payer (if essentially nonprofit) insurance funds.

Our own Medicare program uses administered pricing, attempting to tie payments to the actual cost of services, and it has been modestly successful in holding costs down. But its payments cannot get too far out of line from the rest of the entrepreneurial system, or physicians and hospitals would not accept its patients.

It has been known for at least fifty years, ever since publication of Kenneth Arrow’s seminal article in the American Economic Review on medical care and welfare economics – see, for instance, Paul Krugman, “Why markets can’t cure healthcare” – that the provision of health care bears no resemblance to a true market. Consumers (that is, patients) cannot comparison-shop; the methods, consequences, and costs of medical care are uncertain; and even the ethical principles of health care differ from those of a conventional market.

So the price of medical care is seldom discussed before being undertaken, and there is no effective countervailing force to the entrepreneurial drive, by all providers, to raise their incomes as high as they are able.

Nevertheless, the U.S. continues to treat health care as if it were a commodity to be purchased, rather than a service to be provided, and there are persistent efforts by the industry itself and by government officials, aided and abetted by numerous economists, to allow health care to continue to be treated as a market commodity.

The consequences of this can be seen, not only in the fact that health care costs in this country are far above those of any other advanced country, none of which allow their providers and suppliers to set their own prices, but the consequences can be seen as well in the complete irrationality of the prices of individual “items” of medical care amounting, in effect, to price gouging.

These wide and inexplicable variations in price have been chronicled in a lengthy investigative piece in Time magazine by Steven Brill, “Bitter Pill: Why Medical Bills are Killing Us,” and in Elisabeth Rosenthal’s recent reports in The New York Times on the cost of colonoscopies, “The $2.7 Trillion Medical Bill: Colonoscopies Explain Why U.S. Leads the World in Health Expenditures” and of childbirth, “American Way of Birth, Costliest in the World.”

In other words, the problem with the American health care system is not just the waste in the insurance system. It is that we have allowed a Wild West approach to the business of medical care to develop in this country. The “invisible hand” doesn’t exercise any control, and so there is nothing but naked self-interest and, occasionally, ethical considerations, to constrain the cost of medical care.

Today we are witnessing the consolidation of hospital systems and medical supply firms which, as the evidence has shown, can then set their own prices and force insurance companies, who must have them in their networks, to accept whatever charges they impose. Other countries avoid this situation through government mechanisms which lay a strong hand on the system, even when it is not the sole payer. Fees, charges, insurance premiums are all regulated by government to ensure that the system is affordable for the society while still maintaining universal access to health care.

The Affordable Care Act avoids anything remotely resembling price regulation.

The ACA is built on the idea that, through competition among insurance companies, costs can be brought under control. This is a fantasy. Increasingly, the insurance companies are “cost takers,” not “cost makers.” On the one hand, they will face, in the exchanges/marketplaces, increased competition from lower-cost insurers, but they will also face pressure from the hospital “empires” for higher prices and to keep those institutional giants within their networks.

There are attempts to constrain costs by imposing cost-sharing (“skin in the game”) on patients. Some economists claim this will lead patients to act more like smart consumers. However, there is a mountain of evidence that this is a false belief.

Co-pays and deductibles have their greatest effect on the decision to seek primary care, but this is the least-costly portion of health care. Cost-sharing has no serious effect on the most costly parts of medical care, inpatient care and expensive procedures. (See especially reviews by Katherine Swartz, “Cost Sharing: Effects on Spending and Outcomes,” and Dahlia Remler and Jessica Greene, “Cost-sharing: A Blunt Instrument.” Also, Patryk Perkowski and Leonard Rodberg, “Does Cost-Sharing Affect Health Care Spending: An International Comparison,” forthcoming.)

As a consequence, simply replacing insurance companies with a single payer will not, alone, cure the problems of the American health care system. We probably know this, but we don’t articulate it. The agency acting as the single payer must also impose cost discipline on the system, something that we are not accustomed to, and that will perhaps be much more objectionable to the health care industry than the single payer alone.

So, from an advocacy perspective, are we better off not mentioning this, since it will arouse stiff opposition among providers, or should we use it to gain support from those many Americans who are devastated by the costs they face, or expect to face, when they are ill?

Eventually, the providers will understand this without our telling them, but the public will not. Americans take for granted that doctors and hospitals set their own charges. The fact that there is another way to run a health care system is not something that is ever discussed. No one will tell them but those of us who take a critical, systemic view of the health care landscape and can show that there is a real alternative that works, everywhere else in the world but here.

Leonard Rodberg, Ph.D., is professor and chair of the Urban Studies Department at Queens College, City University of New York. He serves as research director of the N.Y. Metro chapter of Physicians for a National Health Program.