And by the way, I agree that we shouldn't beg the government for a handout

[In a long back-and-forth exchange [1] between Gregory [2] and myself, I posted the following, which I'm posting here as well.]

There were two comments to How big a problem is lack of health insurance? [3] that really stood out for me. The first one:

A few points. I lived under socialized medicine in England and it is no panacea. The rationing of medical care is ridiculous and they keep ever increasing amounts of money into a system that is failing. Moore extols virtues and buries the vices of the system.

As to insurance, we really have no agreement about what is health insurance and what should it provide. Is it to protect people financially from catastrophic illnesses? Provide all medical care no matter the illness? Cover only those illnesses/services you want from a menu of options? For instance, one would think a gay man isn't interested in maternity care for him (and his partner).

Until we agree on the terms, this debate will be divisive and solve little. But politicians will continue bloviate regardless through this election cycle.

And the second one:

I found this comment hilarious.

“Not just one, but every other industrialized country manages to cover everyone, including all children, while having much lower costs and, by most measures, better health outcomes and more preventative care. It's no big mystery.”

The British system recently admitted to rationing of care. Many people have been hurt by that. Some have even died.

In Canada, diagnostic tests are often delayed for months. In some cases this means that the patient will die before getting properly diagnosed.

The reason why other systems have lower costs for drugs is because their governments mandate those costs and Americans subsidize them by paying higher prices for the same drugs.

I think we need to start questioning why health care is so expensive. And not just here, but in the West in general (why else would England ration healthcare?).

Where's the money going? I'll be looking at three aspects of health care in an attempt to figure out why it's so bloody expensive (pardon the pun).

The Student, The Resident and the Doctor

I start, with the doctors.

Becoming a doctor requires at least a decade of schooling. Four years of pre-med, four years of medical school, one year of internship, and three years of being a resident. And eight years of schooling isn't cheap. Anywhere from $100,000 to $240,000 total (reference [4], reference [5]). Student loans seem to average about 10% interest rate (reference [6]) so it's basically similar in cost to a mortgage (but without the benefit of selling it to someone else if things go rough). So your average doctor is facing nearly $200,000 of debt just for the honor of being able to say “cough for me please … okay, take these pills and call me in the morning.”

That in itself limits the number of doctors available, and if you remember Economics 101 [7], if the supply remains constant yet the demand goes up, so does the price. And in this case, the supply is restricted.

Salaries for doctors appear to range $112,000 to $360,000 per year [8], depending upon speciality and skill, with an average that seems to be around $230,000/year (although I didn't actually calculate that, it seems right).

So our doctor now makes $230,000 a year (I suspect not for a newly graduated doctor, but hey, let's be generous). Assuming an average of $200,000 in student loans at 10%, being paid back over 30 years (and I have no idea if this is realistic, but it's a ballpark figure) that means the doctor is paying around $1,760/month in student payments. That works out to 11% of his income. His income tax bracket is 33%, so now we're up to 44% of his income is already spoken for before he can pay his mortgage.

Oh, then there's medical malpractice insurance.

Some quick searches (reference [9], reference [10]) seem to place medical malpractice premiums between $15,000 and $18,400 a year. Split the difference and we get $16,700 a year (and probably way higher for obstetricians [11]) which is another 7% of his income removed (we're now up to 51% of our doctor's salary gone before he can use it).

No wonder doctors make five figures a year—otherwise, they can't afford to be doctors!

The Man, The Plan, The HMO (Health Maintenance Organization)

Assuming you have health coverage, you don't pay for it.

Oh, you may pay some token amount like $20/visit, but otherwise, who cares what the price is? You're not paying it, your insurance is.

You don't select doctors, clinics or hospitals on the basis of price, but on the primary basis of “is he/she/it listed in the little black book of allowable doctors/clinics/hospitals,” secondarily on “which one is closer” and lastly on “which doctor/clinic/hospital on that list do I like the most/hate the least?”

Notice that price isn't among the factors here.

Sure, you'll get a bill and see the price the doctor/clinic/hospital charged the insurance company and you'll go “Whew, glad I have insurance to cover that!” And you may have to [DELETED-bitch-DELETED] argue a bit with the insurance company to actually pay that amount.

But generally, price isn't a primary consideration.

Until you don't have insurance, but that's what we're arguing about here.

I digress.

If you were handed a bill for $225 for a few ankle X-rays (reference [12]) and had to pay it out of pocket, you might really start questioning the doctor for his outrageous fees; considering that you used to get foot X-rays for free at shoe stores [13], you might just tell the doctor where they can shove those ankle X-rays. At the very least, you probably won't be going back to that doctor any time soon. And possibly most people. The doctor may then have to rethink the $225 price, and drop it to get customers back in the door.

The insurance company, on the other hand, just shrugs and pays the $225.

But why does an ankle X-ray cost $225? Part of it is because that's what the insurance companies can bear to pay. Another part is the administrative overhead the doctors/clinics/hospitals have to go through in order to get money from said insurance companies (reference [14], reference [15]). A doctor will have to have extra staff (even if it's just one overworked person) to handle just the paperwork.

Again, these costs are passed on down.

The insurance company just shrugs and pays.

And if the insurance company will pay $225 for an X-ray, why not $300?

We shrug and go “whew, glad I have insurance to cover that!”

The insurance company shrugs and pays.

And in the end, we pay.

The Pharms, The FDA (Food and Drug Administration) And the jagged little pill

It's been claimed that pharmaceutical companies make too much money [16] at the expense of the sick, and while there may be some truth to that, it's also true that it's hideously expensive to bring new drugs to market [17]. And a major portion of that is the testing required by the FDA (Food and Drug Administration) [18] (reference [19], reference [20], reference [21], reference [22], reference [23], reference [24], reference [25], reference [26]). More clinical tests mean more money spent, and more time spent, before a pharmaceutical company can market and hopefully recoup its development costs. And forget profits, just breaking even is difficult enough. And you might think it would be easy for a pharmaceutical to recoup its development costs in twenty years (the length of a patent giving exclusive rights to the patent owners), but I'm guessing it depends upon how popular it is (or how common the ailment it cures or prevents).

It also doesn't help that other countries outside the US (United States) set caps to what the pharmaceutical companies can charge, and it becomes even harder to recoup the development costs (and this gets back to the comment above, where the US subsidizes the cost of medicine elsewhere by charging more domestically).

The Uninsured, The Illegals And justice for all.

An emergency room cannot turn anyone away, therefore, those who can't get insurance for whatever reason often head there to get treatment. And since most can't pay, the hospital has to subsidize the costs of the emergency room with higher prices elsewhere.

So there you go. It's expensive because it's expensive to have doctors. It's expensive because we aren't price sensitive. It's expensive because drug testing is expensive. It's expensive because a lot of people don't pay. It's expensive because of half a dozen other reasons I forgot to mention.

Is there a fix?

I suspect there is, but it's probably one that nobody will like.

[1] http://corsair2.livejournal.com/220452.html

[2] http://corsair2.livejournal.com/

[3] http://gregmankiw.blogspot.com/2007/09/how-big-problem-is-lack-of-health.html

[4] http://gradschool.about.com/od/medicalschool/f/MedSchoolCost.htm

[5] http://money.cnn.com/2005/10/17/pf/college/college_costs/index.htm

[6] http://www.salliemae.com/get_student_loan/apply_student_loan/interest_rates_fees/

[7] http://en.wikipedia.org/wiki/Supply_and_demand

[8] http://www.studentdoc.com/salaries.html

[9] http://www.iii.org/media/hottopics/insurance/medicalmal/

[10] http://www.medicalnewstoday.com/articles/43147.php