High U.S. Health Prices from Market Power?

The National Academy of Social Insurance (NASI) recently published a consensus report on healthcare-provider consolidation. Basically, we have a growing problem in that hospitals are buying up each other and also physician practices, which leads to reduced competition and higher prices.

The report was promoted with an op-ed in The Hill by the esteemed Robert A. Berenson (Urban Institute) and G. William Hoagland (Bipartisan Policy Center):

The use of market power — or the ability to raise and keep prices higher than would prevail in a competitive market – is the key reason the United States spends so much more on healthcare than other countries.

For policymakers, tackling the lack of competition is like climbing a mountain. Even the initial steps — creating more competition — may be difficult, but they must be explored before more regulatory action further down the path is considered.

These are remarkable statements — and difficult to accept.

The primary reason U.S. prices for health goods and services are higher than other countries’ prices is that the United States has significantly higher per capita income than other countries. Health care is a superior good: The richer you are, the more you want.

Also, high-income earners in the United States earn more than high-income earners in other countries. Incomes for physicians in the U.S. are not set in relation to incomes for physicians internationally, but settle in about the same place relative to other high-income earners in the U.S. as their international peers’ incomes do. (See Cutler & Ly.)

Government also has a role to play in mucking up medical prices, through its Soviet-style price fixing of physicians’ fees in Medicare. High prescription drug prices? Blame the FDA’s regulatory burden.

When it comes to hospitals, I can happily concede the gist of the argument. However, I would not identify it as “market power” but as political power, which allows hospitals to drive policies that increase their revenues and suppress competition.

So, “tackling the lack of competition” is not something toward which policymakers should make “initial steps.” On the contrary, policymakers have taken too many steps into health care already, effectively stomping price competition. To allow (not “create”) more competition, they need to step back.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s new book: A Better Choice: Healthcare Solutions for America, by John C. Goodman.

John R. Graham is a former Senior Fellow at the Independent Institute.
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