It is also important to remember that the money problem in healthcare isn’t only the prices providers are charging. Unfortunately, in our quest to lower the amount that patients actually pay for healthcare, we have become confused about the difference between cost and price. As North Carolina State University economics professor Mike Walden explains, “Cost is simply what it takes, in terms of dollars or resources, to produce a particular product or service.” Walden goes on to enumerate the resources it takes to produce a restaurant meal: the food, the labor, as well as a portion of the cost of the building, the utilities and the kitchen equipment.
Price, on the other hand, is what the restaurant actually charges for the meal. If I give you a coupon for $15 to make your lunch free, I have reduced what you pay for your meal, but I haven’t reduced the cost of what it takes to produce the meal. If it takes $15 worth of food, labor and overhead to produce a particular meal, the restaurant cannot sell it for less without losing money and eventually going out of business.
Where do medical costs come from? They begin with what it costs to train a doctor properly. In 2012, according to the Association for American Medical Colleges, the median amount of education debt for a new doctor was $160,000 for those attending public institutions and $190,000 for those graduating from private medical schools. Then doctors in private practice must pay all the overhead costs associated with running their offices and paying their employees. Then there is malpractice insurance, new equipment, continual training, and administrative costs for filing claims with insurance companies and negotiating payments.
Other medical costs are associated with the tremendous resources it takes to run hospitals as well as research and test new treatments and drugs. For example, according to the National Institutes of Health, the average cost for a pharmaceutical company to bring a new drug to market is between 1.3 and 1.7 billion dollars. A Gallup study found that more than $650 billion dollars is spent each year on “defensive medicine”—procedures and tests ordered by doctors out of fear of lawsuits.
Transparency in healthcare prices will help consumers get the best deal on the tests and treatments they need. However, the more pressing need is to identify ways to reduce the actual costs of healthcare. In addition, comprehensive tort reform to protect doctors from frivolous or opportunistic lawsuits will help lower costs, as will reducing the regulatory burden on newer treatments. These simple steps seem like a very good place to start.
Bishop Harry Jackson is chairman of the High Impact Leadership Coalition and senior pastor of Hope Christian Church in Beltsville, MD, and co-authored, Personal Faith, Public Policy [FrontLine; March 2008] with Tony Perkins, president of the Family Research Council.