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Source link: http://archive.mises.org/5499/why-is-medical-care-so-expensive/

Why is Medical Care so Expensive?

August 22, 2006 by

Medical expenses are rising faster than the costs of any other service. And many observers offer lucid explanations of the medical-spending explosion. Few dare to state that spiraling health-care costs are the inevitable consequence of a 1965 Social Security amendment molding Medicare and Medicaid. But there cannot be any doubt that the massive injection of political funds and the growing role of legislators and regulators have radically changed the very nature and structure of the health-care industry. FULL ARTICLE


Sidney L. Patin August 22, 2006 at 9:49 am

What Mr. Sennholz refuses to say is the real reason for the high cost of medical care. Doctors and hospitals charge too much money. No one wants to say that for fear of insulting these so-called angels of mercy, but the fact of the matter is that the medical industry is a monopoly, complete with price fixing and gouging of customers for a service that cannot be obtained elsewhere. They are indeed the worse kind of drug dealer, because you either pay what they want, or you die, and there is no competition because the AMA and their ilk at the medical schools see to it that the number of doctors is limited. And people just keep paying. This country should look at a different kind of medical system.

Doug G. August 22, 2006 at 10:04 am

Health care is expensive because the consumer of health care isn’t exposed to the cost. Make consumers pay their own way and things will change. Step 1: Separate health “insurance” from employment. This forces consumers to shop for health insurance and feel the cost of it. Step 2: Make it truly insurance — i.e. the consumer pays out of pocket for routine medical costs (doctors visits, lab tests), and insurance only kicks in after some deductable. (Like home insurance or car insurance) When the customer feels the pain of how much he is paying, he will seek out cheaper alternatives.

George Giles August 22, 2006 at 10:48 am

The American Medical Association is the strongest labor union in he world. It is a cartel controlling supply, thus forces higher prices for the practitioner. It is sancitoned at all levels of the legal hierarchy from the DEA to DOJ, and Congress. Competition is not allowed, everyone is massively regulated, and higher prices for consumers are the norm – Basic Economics. Break the union, and all else will fall into place. Until that happens we will pay more for less with little to no control over the quality of product delivered. Everyone in health care knows this, especially the doctors.

We do not hear of a dental, chiropractic or diesel mechanic shortage, as they are not cartels, admission is easily gained. The AMA regulates the numbers of training slots available (Medical School Admission) keeping supply low and prices high.

billwald August 22, 2006 at 11:17 am

“Health insurance” is expensive because it is a pre paid medical system and not insurance. If we had “food insurance,” a pre paid food purchase plan, then food costs would also double. I am surprised that Prof. Sennholz buys into the fiction of “health insurance.”

It was “real” insurance back when it was invented and called “major medical insurance.” It only covered over night hospital stays and serious accidents. It excluded pre existing conditions.

adi August 22, 2006 at 11:55 am

This question is asked at the ( hypothetical ) Examination Considering the Increase of Health Expenditures.

“Medical expenditures are raising fast nowadays and different reasons are suggested”

“Which of the following answers do you consider being right one(s)?”

a) Govt intervention is pushing up costs since administrative practises and bureaucrative waste of different health policies contribute to this.
b) Monopoly union practises of AMA and their connection with the regulators.
c) Customer of medical care is insulated from economic effects of his decisions since he doesnt pay expenses directly. There is a major incentive to costs to increase.
d) Increasing incomes of the people will direct resources to health care.
e) All of the above are true.
f) None of the above are true.

I would probably pick the e as being good answer

Roger M August 22, 2006 at 12:20 pm

The government artificially stimulates demand with Medicaid and Medicare while restricting the supply of doctors through the AMA. As a result, the average doctor makes $180,000 per year from sick people while half of all bankruptcies are due to medical costs.

Hospitals work very much like monopoly utilities in that the supply curve slopes downwards instead of upwards as it would in a free market. High fixed costs and inelastic demand are the causes. If an electric utility loses consumers, it raises rates because it has fewer consumers over which to spread fixed costs. In the same way, hospitals charge more when they lose customers because they don’t compete with each other and they know that their consumers have no choice but to use the hospital services.

Nat August 22, 2006 at 12:53 pm

In one of the 1992 Presidential debates, then governor Bill Clinton admitted that the elderly paid a higher percentage of their income to healthcare now (1992) than when before Medicare was passed.

I’m sure it is even more true today.

Eric August 22, 2006 at 12:53 pm

Another factor that creates high costs is medical licensure. By restricting entry into the medical profession, the doctors’s union (AMA) raises the price of its product. As government restricts and regulates doctors, fewer people than ever are willing to pay the huge costs to become licensed.

How many times a year must I go see my doctor to get a renewed blood pressure medication. While I can see the benefit of restricting anti-biotics (overuse lowers their effectivness) who’s going to be hurt if I just buy some meds that I’ve been using for years.

Consider the prices of laser eye surgery, not normally covered by insurance nor medicare etc. Ten years ago, when the FDA allowed a doctor to slice up my left eye (RK) they refused to let me use a laser on my right eye. Once I messed up my left eye with radial cuts, I then qualified for a protocol so I could use the laser on my right eye – you see, I had a new condition, anisimetropia (sp?) which means two eyes radically different.

The price was then $1500 per eye. Now I see ads for as little as $500 which includes all the new custom features not then available and lasik is the norm (I had prk before lasik was approved). So, fooey on new technology driving up the costs. I may now have to go back and laser my left eye to fix the damage the rk surgery caused. Thanks FDA!

Nick F. August 22, 2006 at 1:38 pm

Health care costs aren’t simply going up, they are being reallocated. The people not affected by “rising” healthcare costs are the uninsured who can recieve medical care at any time in an emergency room by government mandate.

The number of uninsured are rising therefore the number of uninsured in the emergency rooms of the hospital are rising. Someone has to pay for them. The government has indirectly mandated that those who can pay for medical care will also pay for the uninsured. The direct result is that the costs of healthcare for people who can pay it are rising at an unpresidented rate because the medical facility must get revenues to pay for the bills or risk shutting down. But for the people without insurance, healtcare costs have remained stagnant (i.e. free).

This is in addition to some of the reasons proposed in the article as well as the fact that medicare and medicaid do not pay the full amount of the doctor’s bill. This causes the hospital, clinic, or doctor to charge ever larger bills to those who can pay it.

Curt Howland August 22, 2006 at 1:44 pm

The vast majority of “medical” stuff is, and always has been, “eye, ear, nose and throat”. What was the work of the doctors called “physicians”.

One of the disasters of the AMA stranglehold on medical service in the US has been to make “every doctor a surgeon”. No longer is a doctor just some guy who looks in your eye and tells you “take to asperines and call me in the morning”.

At the same time, the AMA will not let nurses do the routine work. Nurses are sufficiently educated to do family medicine, just as much as the old “family doctor” was if not more. And it is trivial to call upon a “real” doctor for anything that the nurse, or shall we be honest and say physician, doesn’t recognize or knows to be beyond their skills to effectively treat.

Some places are hiring “nurse practitioners” now. A mall office with a couple of nurses, working on a cash basis, offering routine stuff for less than half what a real “doctor” would charge. But then the regulators step up, for our safety of course, and refuse to allow them to prescribe medicine, or do anything outside of their “procedures” book (state approved book, of course).

The reason for the monopoly prices we pay for medical treatment is because it is a monopoly price. Remove government coercion, let those who wish to practice do so in the manner they choose, allow liability insurance and cooperative certification agencies to function, and we’ll have cheap and effective health care that will be the envy of the world (again).

I honestly expect that this turn over would be almost instantaneous as competent nurses and doctors who really care about people abandon the establishment structure and start making house calls (again).

Curt Howland August 22, 2006 at 1:56 pm

Ok, someone named Sixstringbandit posted this to digg 7 days ago, and since it’s already been posted and is older than 24 hours it cannot make the front page no matter how many votes it gets.

Whoever it was who knew this article was coming out a week ahead of time, you have done the article and the community a disservice. Please do not pre-post articles.

Devin Savage August 22, 2006 at 2:42 pm

I am commenting on the big quirk of our health care system: Insurance companies making a profit on the doctor-patient relationship. There are only so many dollars any economy has to put toward health care. When too high a percent of the GDP goes toward health care, the competitiveness of the economy goes down. It’s like any other overhead. Insurance companies take huge quantities of money out of the system, dollars that could be used for patient care improved facilities and so on. Further, large employers like Wal-Mart freeload by paying low wages AND placing the burden of health care costs onto the taxpayer via Medicaid.
No wonder we are in trouble.

Jacob Steelman August 22, 2006 at 4:11 pm

In 1994 I had to have open heart surgery. It was my first major medical problem. As I was standing in line waiting to visit my surgeon for the first time I was struck by all the people in line who were providing the receptionist their medicare cards. It hit me what was happening – the government funding had created a queue far larger than it might have been had these all been private funded patients such as myself. Thus the spiraling costs of health care services are directly attributable to the government.

Jacob Steelman August 22, 2006 at 4:18 pm

In 1994 I had to have open heart surgery. It was my first major medical problem. As I was standing in line waiting to visit my surgeon for the first time I was struck by all the people in line who were providing the receptionist their medicare cards. The reality of what was happening hit me – the government funding had created a queue far larger than it would have been had those in line all been private funded patients such as myself. Thus the spiraling costs of health care services are directly attributable to the government.

Vince Daliessio August 22, 2006 at 5:07 pm

Devin said;

“I am commenting on the big quirk of our health care system: Insurance companies making a profit on the doctor-patient relationship…It’s like any other overhead. Insurance companies take huge quantities of money out of the system, dollars that could be used for patient care improved facilities and so on.”

A good observation Devin, but why do you suppose this is? Don’t free markets tend to decrease prices and increase availability of goods and services over time? Why do the costs of medical care then keep going up?

Could it be that there isn’t a free market in medicine, or that insurance companies earn large profits by navigating an excessively regulated and complicated medical system?

Mark Anderson August 22, 2006 at 7:12 pm

Other factors driving up costs: government licensing of and defining what “healthcare” is. Also, licensing of, accrediting and defining the proper “education” in order to get the medical license. Between those two things, the supply of healthcare is dramatically diminished.

And don’t forget the even more obvious: politicians expanding the money supply to finance their spending orgies.

Mark Anderson August 22, 2006 at 7:35 pm

Stick with Say’s Law. I see that we have basically two camps here: those who say the demand, i.e., consumers, are “responsible” for higher costs, and those who say that government interference with the supply through regulations is the problem.

Overall, I would say the latter group is more correct. Government curtailing supply of anything will INHERENTLY make costs higher than they otherwise would be. Those who blame the consumer are correct under circumstances. It is true that the government, which doesn’t earn its income, but gains BY spending, can drive up prices through its violation of Say’s Law.

As far as Doug G., who argues that making the consumer become the payer will correct prices, he is totally wrong. Don’t you think employers can “shop” around for insurance, too? Or, for that matter, not even offer health insurance, if it is too costly? Changing who pays is akin to shifting chairs around on the deck of the Titanic. Albeit, government spending is not encumbered by the cost vs. benefit decision-making process. Therefore, if GOVERNMENT spending is curtailed, that would certainly make a difference on the level of CONSUMPTION, but not necessarily the level of PRICES.

Think back to Say’s Law. Increased demand, financed out of supply, should not raise prices. More people, more needs, but also more production. Less consumption is only the natural response to inflation, but is not inflation’s cure.

John August 22, 2006 at 8:25 pm

Before Medicare physicians spent much of their time doing work for less than their customary fees because half a fee is better than no fee. They voluntered in hopes of getting a paying patient out of the experiance. Since Medicare, so many people have “insurance” that fees can be raised, hours spent volunteering have dried up, and medicals schools have become profit centers for universities. I guess they call that progress!

paulnelson August 22, 2006 at 9:03 pm

I woke on the morning of July 8th with blood in my urine. I went to a local physician who ordered urine testing at a local hospital. Four hours later I saw the physician again and he ordered blood testing, on July 9th I saw the physician yet again at which time he said that I probably had kidney cancer. The cost was about $600 for the laboratory tests and about $400 for the physician. Surgery and follow-up care would probably cost something like a quarter million dollars. Since I carry no insurance, I bought a ticket to Manila, and checked into the Makati Medical Center (an excellent hospital) on July 14th. Total cost of a month long stay, with the services of 8 different physicians and surgeons was less than $20,000. Simply put there IS competition in medical services, you just have to expand your universe of possible suppliers.

Devin Savage August 22, 2006 at 9:10 pm

Vince said
Could it be that there isn't a free market in medicine, or that insurance companies earn large profits by navigating an excessively regulated and complicated medical system?>

I don’t claim the answer to this, I only know that my take-home pay has actually gone down since 2004. What has happened since then? Companies have closed down and moved overseas, leaving their former employees to fend for themselves, often at low paying jobs with few benefits. Ohio Medicaid payments have been cut up to 15% since Jan 1, 2006. With the dollar’s decline many of the supplies I buy have gone up in cost. Insurance maximums have stagnated. Malpractice premiums go up every year due to what is called “accumulated risk.” So my costs have gone up but my revenues have fallen since 2004, my best year ever in 10 years.
Where is this money going? Well I am a doc and it is not going into my pocket, I can assure you. I practice out of an old renovated home that is now on a busy street. The insurance company headquarters (MedBen) has a beautiful, gleaming new building in downtown Newark, Ohio, and their CEO lives in a home that I couldn’t even pay the tax bill on.
Further, you have to ask the question who is paying more for health care? Delta Dental fees have not gone up for my are since 2004. Other insurance plans and PPOs have even lower fees than Delta. So I have to charge more to those who have no insurance.
So in reality I think it is those people who have no insurance, who might be subsidizing this broken system.

Mark Brabson August 22, 2006 at 11:01 pm

There has been no free market in medicine in this country for a very long time, thanks to Medicare, Medicaid, Licensure and every other government interference.

The cure. End Medicare and Medicaid, immediately. End licensure. Abolish the FDA and privatize the drug approval process. Prohibit private insurance except at the catastrophic level, perhaps $25,000 or more. Place all medicine and drugs on fee for service.

Ok folks. Now that we have just yanked the pillars of price supports out from under medicine. Guess what. Doctors and hospitals will find out, probably in the first day, that patients can’t/won’t pay the ridiculous prices they are charging and their is no public/private bureacracy to come to the rescue. So they lower their prices until demand comes up. Same with drugs. I would imagine the initial price crash would occur and be done in the first week. Prices would be stabilizing by the end of the first month. Doctors could cut costs upfront by immediately discharging all their billing specialists and insurance specialists.

This isn’t rocket science. It can be done.

I am already a cash payer. Can’t wait for all the rest of you to join me.

stephen ottridge August 22, 2006 at 11:04 pm

Statin drugs like Lipitor, Crestor, Zocor are widely advertised and prescribed. In many people they cause side effects that themselves have to be treated by the medical industry. In my case it was nerve damage, I had CAT scan, visit to specialist Neurologist, visit to Emergency at hospital.
All this for treating something that is not serious in the first place.

Allen Young August 23, 2006 at 8:32 am

08/23/06 At age 76, I’m an 11-year “customer” of Medicare, a principal consumer and payor of medical expenses.
I suggest there can be no intelligent discussion of, or understanding of, medical expenses until “prices” are defined. Are “prices” and expenses billed, or are they those that providers in fact receive? And, that the providers, at the outset, expect to receive.

My experience with Medicare is that billed figures are fictions. That if providers received billed amounts, they would be amazed. Instead they receive 20 to 50% of billed amounts. And expect that. They accordingly each year boost billed “prices”, expecting, actually, hopefully, to receive enough – to stay in business.

Providers also boost prices because many patients they treat, do not have insurance: Medicare or other. And, they cannot possibly pay billed “prices” and amounts. The providers, expect, understand this. And accordingly hope to receive, from those who do pay, enough to “cover” those who do not, cannot pay.

Until ficticous billed prices are recognized, and understood, I pay little attention to stories of “reform”. Or, of change.
Allen Young

Mark Brabson August 23, 2006 at 8:47 am

“Ficticious prices” are a result of the Medicaid and insurance bureacracy. Eliminate that bureacracy, as I sugggest above, and this problem is instantly eliminated.

If their was such a bureacracy for food, you would have the exact same problem. You might see a price of $20.00 for a steak at the supermarket, but when your government statement came in, you might see that only $18.00 was approved.

The problem you describe is very real. And all the fault of government.

Eric August 23, 2006 at 11:26 am


I was with you until you said, “Prohibit private insurance except at the catastrophic level, perhaps $25,000 or more”
Why? And once you use words like, force, prohibit, etc. you’re back in the regulation business – and this is how it starts, one good intention. If there’s going to be a free market, then what’s wrong with people buying insurance of any kind. If doctors refuse to work with people with this sort of insurance, then there’s no need to prohibit it. If doctors charge some more than others, they’ll lose business. Perhaps to nurses, for all the little stuff. Once the market is set free, solutions you or I would never think of will be thought of by someone wishing to make a buck.
But you can’t have a free market with regulations; in no time at all you’d be back where we are now.

billwald August 23, 2006 at 11:41 am

One way to solve the problem would be to apply the income tax all employee medical benefits. If people had the choice of the employee benefit or the cash most would take the cash and pay cash for the service – especially if they could put pre tax cash into a medical savings account.

Yancey Ward August 23, 2006 at 11:59 am

Well, I agree with those who say the artificially restricted supply, caused by the government with the approval of the hospitals and doctors, is the primary cause for the escalating costs.

Mark Brabson August 23, 2006 at 8:05 pm


Lemme lay out my reason’s for taking that step.

1. It is a necessary step in removing all price supports from the medical market. If government price supports are removed, but private supports remain, the price falloff will be incomplete, as demand will still be artificially high.

2. It is a necessary step in demolishing the current medical bureacracy’s. Not only must the government spawned bureacracy’s be brought down, but also the private one’s that were spawned out of the current system of regulations.

3. It is a necessary step in destroying the relationship between business/employment and medical insurance. This relationship was, of course, originally spawned by government wage controls in the World War II era. I see no reason why employers should waste their valuable time dealing with medical insurance, which is rightly a private matter best left to the employee him/herself.

4. Current medical insurance is NOT insurance in the correct sense of that word. It has been corrupted into a quasi-governmental payment mechanism. As such, I don’t think it can’t be reformed. It should be destroyed instead.

There is my reasoning for taking that step. After consideration though, I will admit that permanant prohibition would not be necessary. Perhaps for a period of a year. That would give time for a true free market to take root. And then when the prohibition ends, the new available insurance would be TRUE insurance, in every sense of that word.

I don’t like the use of force myself, but the situation is kind of unique and I think that is the best way to sweep away the current system.

gene berman August 24, 2006 at 7:09 am


Don’t get sick. Try not to have accidents.

Vince Daliessio August 24, 2006 at 9:25 am

Good advice, Gene.

Mark and Eric, the way to address both of your concerns is to simply eliminate the favored tax treatment of employer-paid health insurance. I’ll even be generous and say that the Congress could make personal deductions for all medical expenses, and we’s still have less of a subsidy effect for medical care than we do now.

Of course that does nothing about Medicare, but it does subject the medical consumption of working Americans to a market so it’s a start.

Girish December 31, 2006 at 12:53 pm

The other fix to this problem is to allow a much larger number of doctors from abroad to immigrate to this country. But the AMA has a death grip on the whole medical market. Its ironic that America’s hard earned status as the greatest country on earth will end not because of dependence on foreign oil but rather on something much closer and more well disguised. Health care is the ticking timebomb on which this country rests.

Steph April 2, 2009 at 11:26 pm

well said

Ken Seifert September 1, 2010 at 11:15 am

Health care is expensive for the same reason that anything else is expensive: Demand exceeds supply. In the case of medicine, that will always be true. Eveyone is going to die and no one wants to. So the demand for medical care is essentially limitless. Supply is limited by legitamate issues of education, training, licenture and certification. Demand is insatiable. Therefore no matter what trick of bookkeeping is used, the cost of medical care will always go up unless we artifically limit demand by setting limits on what will be covered. “Managed care” was an attempt at this, but ultimatly, there will have to be legislation limiting care and protecting doctors from litagation if they refuse care. I don’t see this happining, so the medical care system is going to catistrophically collapse.

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