Why Are Health Care Costs Rising?

Devon Herrick PhD, of the National Center for Policy Analysis, covers this important question in his recent testimony to the House Education & Labor Subcommittee on Health, Employment, Labor and Pensions.

He makes the point that the rapid and unsustainable rise in costs is taking place in the government-run sectors of medicine, such as Medicare. In contrast, in the sectors of medicine that are closest to a true free market, such as cosmetic surgery and LASIK surgery, prices are going down at the same time that the procedures are becoming better and more technologically sophisticated -- which is the normal trend in every other sector of the market.

Here's an excerpt from his testimony:

Fostering Competition. When providers compete for business, the market fosters competition. In competitive markets, producers seek to reduce costs and to offer products that meet customer demands. However, instead of a competitive national market for health insurance, we operate under a patchwork of 50 different sets of state regulations. Since each state insurance market is protected from interstate competition, legislators often require insurers to cover services that drive up premiums. For example, about one-fourth of states mandate benefit packages that cover acupuncture and marriage counseling. More than half require coverage for social workers and 60 percent for contraceptives. Seven states require coverage for hairpieces and nine, hearing aids. Needless to say, these mandates drive up the cost of providing health insurance, often making it prohibitively expensive for an insurer licensed in one state to do business in another state. As a result, consumers have little choice among plans. In many localities, only one insurance product is available, so the consumer is forced to buy an overpriced product, or forgo insurance altogether.

Fostering Innovation. When patients directly control their health care dollars, not only do prices go down, medical providers begin to offer innovative services to meet the demand of empowered patients. Telephone consultations, walk-in retail clinics, electronic medical records, and personalized care are among the innovative services provided by doctors. These new physician services tend to have two characteristics: (a) they offer patients greater convenience and (b) they step outside normal reimbursement channels. Furthermore, many of these innovations (such as electronic medical records) dramatically improve the delivery of quality health care.

Read the whole thing.