Why Is Health Coverage So Expensive?

No one denies American health care costs are increasing and increasing dramatically. In 1960, health related expenses consumed about 6 percent of American spending, according to "Businessweek" magazine. By 2006 to 2007 this figure increased to more than 17 percent, the magazine reports. These increases are straining governments, hospitals and insurance firms.

Technology

• An explanation to the increase in health care costs is technology. There is a constant, innovative and fascinating stream of new drugs, procedures and methodologies dealing with every conceivable health care problem. In general, one would suppose that these technologies over time would decrease the amount of spending on health care, since they promise to make treatment easier. Yet, technology costs continue to rise.

Insurance

• Technology is only part of the equation. The Massachusetts Institute of Technology has long studied the rise in medical costs. Recently, as National Public Radio reports, some studies suggest it is the very structure of health insurance that has driven costs up. Insurance means --- for doctors and hospitals --- a steady, guaranteed and regular stream of cash to their institutions. Medical technologies are purchased, accepted and used because professionals known full well they can merely bill health insurance for the cost. The system of managed care rewards doctors for seeing as many patients as possible. Even worse, the fee-for-service system encourages doctors to order as many treatments as plausible for a given condition.

Regulation

• Many in the libertarian camp love to point to state regulation as the culprit to rising health care costs. NPR reports about operating room doctors who cavalierly use and throw away instruments that cost a fortune. These instruments cost a fortune because the government demands these instruments be produced in a certain way and function precisely as intended. While this might seem rational, it does drive up costs. Add to this the increasing cost of malpractice insurance, paperwork, legal fees as well as oversight and taxes, and one can see why costs have been driven up so markedly.

Medicare and Medicaid

• The late Dr. Hanz Sennholz, formerly of the Ludwig von Mises Institute, made the argument that the existence of government insurance alongside private forms of insurance has led many to avoid private insurance, only to rely on public health care insurance such as Medicare and Medicaid. This forces more money to these social programs. Similar to the MIT study, these forms of insurance also constitute another guaranteed revenue stream to doctors and hospitals that give no incentive --- for the patient or the doctor --- to control costs. This has led Medicaid to become one of the fastest growing parts of state budgets, and, for many states, the single largest expenditure.