Oh for a health care monopsony

Those who blame for-profit health insurers for high U.S. health care costs usually focus on administrative and marketing costs. As Ezra Klein has highlighted, however, these are difficult to calculate; they're not always significantly higher in the private sector than in the public; and they don't fly as a primary cause of the U.S.'s uniquely high per capita health care spending.

Yet our Balkanized health care payment system does have a huge impact on health care costs. Klein again, citing Kaiser Permanente CEO George Halvorson pointing out that CT scans cost about 3x as much in the U.S. as in Europe, links to a 2003 study published in Health Affairs ("It's the Prices, Stupid...", Gerard F. Anderson et al. ) analyzing why procedures cost so much more in the U.S. than in OECD countries with universal healthcare.

The conclusion of this study bears out T.R. Reid's reporting in The Healing of America. Countries with universal health care all accord government the power of monopsony - "a state in which demand comes from one source." That is, the governments of France, Germany, Japan, Canada and England all set the prices for every procedure (or patient, in a capitated system) -- regardless of whether or not payments are funneled through private (nonprofit) insurers. All of them, by American standards, squeeze doctors and hospitals. Anderson et al:

In the U.S. health system...money flows from households to the providers of health care through a vast network of relatively unccordinated pipes and capillaries of various sizes. Although the huge federal Medicare program and the federal-state Medicaid programs do possess some monopsonistic purchasing power, and large private insurers may enjoy some degree of monopsony power as well in some localities, the highly framented buy side of the U.S. health system is relatively weak by international standards. It is one factor, among others, that could explain the relatively high prices paid for health care and for health professionals in the United States.

In comparison, the government-controlled health systems of Canada, Europe, and Japan allocate considerably more market power to the buy side...

Even a pure monopsonist is ultimately constrained by market forces on the supply side -- that is, by the reservation (minimally acceptable) prices of the providers of health care below which they will not supply their goods or services. But within that limit, monopsonistic buyers enjoy enough market clout to drive down the prices paid for health care and health care inputs fairly close to those reservation prices. It can explain, for example, why Fuchs and Hahn found that "U.S. fees for procedures are more than three times as high as Canadian fees [and] the difference in fees for evaluation and management services is about 80 percent."

From this perspective, individual health insurance companies are not "to blame" for high U.S. health care costs. But the system that allows them to exist is. When the government abjures monopsony power, patients lose.

Doctors do consider themselves underpaid and in some cases overmanaged in monopsony systems. On the other hand, they generally have to cope with zero medical school debt, piddling malpractice insurance fees, and minimal administrative burdens (in France, where national health cards record every procedure and fee, the time and money doctors spend on administration is close to zero). Ironically, one reason U.S. insurers pay doctors and hospitals so much more than their rich country peers is that the balkanized payment and claims system imposes onerous admnistrative costs on providers.