I often write about high prices in health care. Some gene therapy drugs cost more than $1 million for a 1-time treatment. The latest oncology drugs are especially expensive:
Danyelza (neuroblastoma) and Kimmtrak (uveal melanoma) costs $1.2 million and $1.1 million, respectively. The average annual cost of a new cancer drug is more than $250,000. Nearly half (44%) of new cancer drugs are priced at more than $200,000. Numerous cancer drugs cost $70,000 to $120,000 a year.
Kaiser Family Foundation reports that the average cost per day for a hospital stay is about $3,000, although it’s not clear what all that covers. Joint replacement surgery costs anywhere from $20,000 to more than $50,000 with about $40,000 being an average. An inpatient stay for a hip replacement is 1 to 3 days so there are obviously a lot of other charges tacked on to that $3,000 per day charges. According to Debt.org:
The average hospital stay is 4.6 days, at an average cost of $13,262.If surgery is involved, hospital costs soar through the roof. Some of the most common surgeries have price tags that top $100,000.
Earlier I wrote about physicians billing simple tasks, like removing a splinter or freezing off a skin tag, as surgical procedures costing nearly $500. I also wrote about Northwestern Memorial Hospital billing a colonoscopy as two procedures, one for inspecting the colon and another for removing two polyps. Total cost, $19,000 billed as two colonoscopies. In years past I’ve written about $50,000 air ambulance bills and surprise medical bills:
Surprise medical bills occur when patients unknowingly receive medical care from physicians and therapists, or in hospitals, clinics and labs that are not in the provider networks of a patient’s health plan. Many out-of-network providers purposely refused to join provider networks so they can charge fees many times higher than the usual and customary fees reimbursed by health plans.
Of course, charging high prices or refusing to join a network is neither illegal nor immoral. The immoral part is not informing patients ahead of time so they can decline the service and look elsewhere. Not quoting binding prices ahead of services should make it more difficult to collect for those services if there is a bill dispute.
What is the appropriate price? Nobody knows, and that’s the problem. The appropriate price for medical care is the market clearing price where the quantity of services supplied equals the quantity of services demanded. We don’t know what the market clearing price is because we don’t have a free market to indicate market clearing prices. Then there is the fact that the market clearing prices will be much lower than the current prices because many people will lack the money to contract for the service of a surgeon, for example. In other words, the market clearing price for patients with health insurance is different (much higher) than for patients with no health insurance. In a self-pay market, the demand for $1 million therapies is nearly zero since most patients with not have $1 million to spend.
Why not price controls? The problem with price controls is that if a price ceiling is set too low, it reduces supply while boosting demand. The result is shortages, rationing or a degrading of the quality of the goods whose price is set below the market clearing price. There is no easy way to determine what the market prices are outside of a market, since there are thousands of medical prices. The process would likely become political rather than based on efficiency.
Why not Medicare prices for all? Providers often claim they lose money on Medicare. They don’t. All the evidence you need to prove my assertion is the fact that only 1.1% of physicians have formally opted out of the Medicare program. Even if marginal Medicare revenue is below average cost, it is above marginal cost or providers would drop out. Except for military hospitals, virtually all hospitals accept Medicare. Indeed, about 96% of hospitals get at last half of their revenue or more from Medicare, while 82% of hospitals get two-thirds or more of their revenue from the federal program. While Medicare is a huge, volume buyer of medical services, it is not clear that price controls based on Medicare prices would not lead to shortages of services.
What are the appropriate prices for medical care? Economists do not really know; except they should have far lower than they are. The reason for outrageous medical prices is perverse incentives and a lack of competition.
Many good points here, thanks for posting.
Per my reading, Germany has no competition among providers and no self-pay patients.
Yet their prices are modest by our standards.
What are they doing right? (I do not know.)