Understanding Health Care Costs

If patient demand, malpractice costs, the aging population, and advanced technology don’t explain the rising costs of health care, then what does? Research points to three underlying factors: a fragmented system that multiplies administrative costs, the great power that health care providers (doctors, hospitals, pharmaceutical companies, etc.) hold relative to health care consumers (whether individuals, the government, or insurers), and the for-profit basis of the U.S. health care system.

Because Canadian society is probably the most similar to U.S. society, com- paring these two countries helps illustrate why costs are so high in the United States. In the next chapter, we examine the Canadian health care system in detail. At this point, we need only note a few major points. Most important, Canadians receive their health insurance from a single payer: the government. For this reason, the Canadian system is referred to as a single-payer system. Similarly, hospitals receive an annual sum from the government to cover their costs. Those costs are restrained because, unlike in the United States, Canadian hospitals don’t need an expensive administrative system to track patient expenses and submit bills to multiple insurers. As a result, hospital costs per capita in Canada are almost 50% lower than in the United States.

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In Canada, costs are also restrained by government oversight on major capital development: If a Canadian hospital wants to add new beds or purchase new advanced technologies, it must first convince the government that such services are needed (Bodenheimer, 2005b). As a result, hospital costs are considerably lower in Canada than in the United States, even though admission rates are about equal and average stays are longer.

A unified rather than fragmented system also helps restrain Canada’s medical and drug costs. Like hospitals, doctors must submit their bills only to the national insurance system rather than filing myriad different forms with different insurers. Meanwhile, no one need spend money on advertising or selling insurance, trying to collect unpaid bills, or covering the costs of unpaid bills. Drug costs are limited because provincial health administrators develop formularies of the most cost- effective drugs and negotiate with pharmaceutical companies to buy those drugs at discount prices. Similarly, Canada’s national health care system has the economic “muscle” to control the prices it pays doctors, technology companies, and other health care providers.

In addition to the fragmented nature of the U.S. health care system, the fact that health care providers hold more power than health care consumers in the United States has also kept costs high. This results from the fact that profit making—by doctors, hospitals, insurers, pharmaceutical companies, and others— lies at the heart of the U.S. health care system.

As the next section discusses further, in the United States, pharmaceutical companies largely control which drugs come to market, how they are advertised, and at what prices, with few constraints imposed by any national consumer or government forces. Similarly, U.S. hospitals are free of the governmental oversight that constrains costs in Canada and are forced to compete for patients to pay their bills (let alone earn a profit). As a result, hospitals must create demand by adding beds, specialized units (such as heart-transplant units), and expensive technologies (such as kidney-dialysis machines), and then encouraging doctors and patients to use those services.


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