Although American health care markets are highly consolidated, which contributes to higher prices, there are also enough players to impose administrative drag. Rising administrative costs — like billing and price negotiations across many insures — may also explain part of the problem.
The additional costs associated with many insurers, each requiring different billing documentation, adds inefficiency, according to the Harvard health economist David Cutler. According to a recent study, the United States has higher health care administrative costs than other wealthy countries.
“We have big pharma vs. big insurance vs. big hospital networks, and the patient and employers and also the government end up paying the bills,” said Janet Currie, a Princeton health economist. Though we have some large public health care programs, they are not able to keep a lid on prices. Medicare, for example, is forbidden to negotiate as a whole for drug prices, as Ms. Currie pointed out.
But none of this explains the timing of the spending divergence. Why did it start around 1980?
Mr. Starr suggests that the high inflation of the late 1970s contributed to growth in health care spending, which other countries had more systems in place to control. Likewise, Mr. Cutler points to related economic events before 1980 as contributing factors. The oil price shocks of the 1970s hurt economic growth, straining countries’ ability to afford health care. “Thus, all across the world, one sees constraints on payment, technology, etc., in the 1970s and 1980s,” he said. The United States is not different in kind, only degree; our constraints were weaker.
Later on, once those spending constraints eased, “suppliers of medical inputs marketed very costly technological innovations with gusto,” Mr. Aaron said. They “found ready customers in hospitals, medical practices and other entities eager to keep up with rivals in the medical arms race.”
The last third of the 20th century or so was a fertile time for expensive health care innovation. Sherry Glied, an economist and a dean at New York University, offered a few examples: “Coronary artery bypass grafting took off in the mid-to late 1970s. Later, we saw innovations like drug treatments for H.I.V. and premature babies.”