The short answer:
A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else's money. When patients pay their own medical bills, they are conservative consumers.In particular, Herrick notes that our current third-party payor system results in:
* For every $1 worth of hospital care consumed, the patient pays only about three cents out of pocket, on the average; 97 cents is paid by a third party.Herrick contrasts that with the sectors of medicine where consumers pay the bills rather than third parties, such as cosmetic surgery. He notes that in those sectors, demanding consumers seek the best value for their dollar -- and the result is that providers offer ever-improving services at lower prices.
* For every $1 worth of physician services consumed, the patient pays less than 10 cents out of pocket, on the average.
* For the health care system as a whole, every time patients consume $1 in services, they pay only 12 cents out of pocket.
(Read the full text of "Why Health Costs Are Still Rising".)
Suppose food were treated the same way as health care, where one paid a monthly premium to a "food co-op", then got to eat at restaurants where the coop would pay 88-97% of the bill. Hence, consumers only had to cover a "food co-pay" of 3-12%. Would most people eat frugally? Or would they eat lavishly as if they were dining from their boss' expense account?
Of course, this would be unsustainable. Under such a system, the food co-ops (or eventually the government) would quickly have to set strict limits on what foods members could purchase. The end result would be the government telling you what you could or could not eat -- on the grounds that others are paying for your meals. Americans may consider such arguments absurd in the realm of food, but the precise same arguments are currently being made in the realm of health care.
Of course third-party payors play a valuable role in providing voluntary catastrophic insurance. Such a service would be of value to many Americans and would thus naturally arise in a free market. But the current system of third-party employer-based insurance is an artifact of bad government tax policies, and would never have arisen in a true free market.
(For more details, see "Moral Health Care Vs. 'Universal Health Care'" from the Winter 2007-2008 issue of The Objective Standard.)