The Cause of Out-of-Control Healthcare Prices: Washington

 Why do prices in healthcare consistently rise faster than prices for everything else in the economy? Ever wonder why this is so? There is a very good reason, but one not commonly known.

According to Mercer’s 2024 National Survey of Employer-Sponsored Health Plans, prices for health insurance will rise 5.8 percent in 2025, the third year in a row that healthcare inflation exceeded general inflation. This pattern of healthcare costs rising faster than most things is well documented. In 1960, the U.S. spent 5.6 percent of GDP on healthcare. Last year, that expenditure was an exorbitant 17.5 percent of GDP.

Employers report they will have to employ cost-cutting measures to offset next year’s higher cost of health insurance, such as raising employees’ deductibles. Of course, this simply passes the inflation on to consumers by increasing workers’ out-of-pocket healthcare costs, which were a staggering $12,637 in 2023. 

Reporter Ginger Christ writes the reason for healthcare’s excessive inflation is “an imbalance between the number of healthcare workers and the demand for services.” In economic terms, supply of healthcare services is not keeping up with demand, so prices rise.

More people demand (and expect) medical care services and goods as more Americans have government health insurance through no-charge Medicaid or ACA subsidies. Add to this millions of illegal aliens now eligible for Medicaid, and the explosion of demand is clear.

“Supply” encompasses caregivers as well as dollars to pay them. The supply of both is shrinking. The worsening shortage of caregivers – doctors, nurses, and therapists – is well documented. What about the supply of money for healthcare?

Last year the U.S. spent $4.8 trillion on its healthcare system, an amount greater than the Japan’s GDP. There is no shortage of dollars per se, just dollars to pay caregivers. Between 31 percent and 50 percent of U.S. healthcare spending goes to federal BARRCOME:  bureaucracy, administration, rules, regulations, compliance, oversight, mandates, and enforcement. Those are the first “healthcare” dollars spent by Washington to pay ... Washington BARRCOME. What dollars remain are available to pay for patient care. 

The goal of a free market is to produce the most, best, cheapest, and quickest of whatever is for sale. It achieves this “magic” by having consumers and sellers directly transact the buy-sell agreement. Through hundreds of millions of interactions, they balance supply and demand with prices as signals between the two groups.

Is the supply-demand imbalance in healthcare an example of catastrophic failure? Yes, but not market failure, because healthcare is not a free market.

Healthcare is a centrally controlled market. It is both a monopoly—sole control of supply—and a monopsony—single determinant of demand.

Washington directly controls the supply of money (payments) for 186 million Americans, 56 percent of the population, through Medicaid/CHIP, Medicare, Tricare, and Emergency Medical Transport and Labor Act of 1986 – medical care for the uninsured. The federal government indirectly controls supply of money for the remaining 147 million Americans with private coverage because insurance companies follow federal “allowable reimbursement [payment] schedules.” The federal government is thus the sole payer, in control of supply.

Washington determines the demand – not the need – for medical care, by regulating health insurance benefits. Benefits are another word for medical goods and services. Again, consumers do not decide what care they get—Washington does.

Since the federal government is the decision-maker for both supply and demand, any imbalance of the two may be laid at its doorstep. When looking for whom to blame for rising healthcare prices, shortages of goods, and long delays in receiving care, look no further than the Beltway.

Deane Waldman, M.D., MBA is Professor Emeritus of Pediatrics, Pathology, and Decision Science; former Director of Center for Healthcare Policy at Texas Public Policy Foundation; former Director of New Mexico Health Insurance Exchange; and author of 12 books, including multi-award winning, Curing the Cancer in U.S. Healthcare: StatesCare and Market-Based Medicine.  Contact him at www.deanewaldman.com.

 

Vance Ginn, Ph.D., is president of Ginn Economic Consulting, host of the Let People Prosper Show, and previously chief economist of the Trump White House's Office of Management and Budget. Follow him on X.com at @VanceGinn.

https://www.realclearhealth.com/articles/2024/09/24/the_cause_of_out-of-control_healthcare_prices_washington_1060304.html