The aggregate cost of medical care in the US in 2007 was $2.26 trillion. That used to be a lot of money before the federal government started spending trillions like they were millions. The pie chart below shows how this cost was distributed. It also is rising faster than GDP and has been doing so for almost a half century.

medical costs

It’s as interesting for what it leaves out as well as what it includes. Under what category were diagnostic tests placed? The cost of imaging and laboratory testing is enormous. The clinician doesn’t get paid for these studies, but he does determine which and how many of these tests are performed.

Also note that the cost of prescription drugs is only 10% of all costs. It’s been that for years. Villainizing drug companies for the high price of their drugs has been a popular pastime since the discovery of penicillin, but even if all drugs were free we’d still be left with a $2 trillion bill. Of course if all drugs were free we’d have no drugs.

The current administration wants to fix the US healthcare system. First it’s not a system and before you fix it you have to understand what doesn’t work. Medical care in the US is the best in the world if you’re inside the tent. Students of medicine at every level want to train in this country. Medical research here is also the best in the world. What’s wrong is that medicine costs too much. The reason it costs too much is that there are no incentives to reduce costs. Every incentive out there encourages extra spending.

No attempt to overhaul our “system” will work if it doesn’t successfully deal with cost. More coverage for more people at less cost is impossible without first understanding and then fixing the forces that drive costs up. After that you’d have to drastically lower the cost of every service without restricting its availability.

An MRI doesn’t have to cost $4000, but health insurance and Medicare encourage high prices at the same time they think they’re containing them. Only a system of competition and money incentives will drive prices down. Patients should be able to shop around for the cheapest MRI they can find. They’d have to have an incentive to do so; which means they’d have to bear up front some of the cost. Today the incentives all support paying the highest price to the nearest provider. If MRIs were priced competitively they’d cost about $100 – $200 at the most.

I don’t think either the public or the government is ready for price competition in medical care. Price competition necessarily means price rationing. What we’ll get instead is rationing by delay. The interesting question is how much degradation in the ease and facility of current medical care will the 85% of the public that has health insurance accept to provide care for the 15% that doesn’t. By the time the answer is in the debate may be over.

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