Steven Brill started his cover story in this week's Time magazine with a simple health-policy question: "Why exactly are the bills so high?"
His article is essentially a 26,000-word answer, the longest story that the magazine has ever run by a single author. It's worth reading in full, but if you're looking for a quick summary, the article seemed to me to boil down to one sentence: The American health-care system does not use rate-setting.
Much of Brill's piece focuses on the absurdly high prices that hospitals and doctors charge for the most mundane items. A single Tylenol tablet can cost $1.50 when "you can buy 100 of them on Amazon for $1.49 even without a hospital’s purchasing power." One patient gets charged $6 for a marker used to mark his body before surgery. Another is billed $77 for each of four boxes of gauze used.
One hospital, according to Brill's math, bills $1,200 per hour for one nurse's services.
"Over the past few decades, we’ve enriched the labs, drug companies, medical device makers, hospital administrators and purveyors of CT scans, MRIs, canes and wheelchairs," Brill concludes. "Meanwhile ... we’ve squeezed everyone outside the system who gets stuck with the bills."
In other countries, that cannot happen: Their federal governments set rates for what both private and public plans can charge for various procedures. Those countries have tended to see much lower growth in health-care costs.
What sets our really expensive health-care system apart from most others isn't necessarily the fact it's not single-payer or universal. It's that the federal government does not regulate the prices that health-care providers can charge.
You can see this in Luxembourg, which had the lowest health-care cost growth — 0.7 percent — of any OECD country in the 2000s. Its system allows patients free choice of what doctor to see or what hospital to visit but has the government set all rates for what doctors get paid for those visits.
Or look at Israel, which has also beaten the OECD average:
The national government exerts direct operational control over a large proportion of total health care expenditures, through a range of mechanisms, including caps on hospital revenue and national contracts with salaried physicians. The Ministry of Finance has been able to persuade the national government to agree to relatively small increases in the health care budget because the system has performed well, with a very high level of public satisfaction.
Germany uses rate-setting, and its health-care costs grew, on average, 2.0 percent annually in the 2000s. France sets rates, as does Switzerland. All three countries have seen slower cost growth than the United States -- although it's worth noting that the United States actually saw slower growth in the 2000s than the OECD average.
In none of the countries with the lowest health-care costs can doctors charge $1.50 for a single Tylenol pill or $77 for a box of gauze. Many studies suggest that is a key reason why their costs have grown more slowly than ours.
It turns out that we don't even have to go oversees to see this: Maryland has succeeded in controlling costs for about four decades now. It is the only state that sets rates for hospitals, with the state government deciding what every Maryland hospital can charge for a given procedure..
That system started in 1976, when Maryland had hospital costs 26 percent higher than the rest of the the country. In 2008, the average cost for a hospital admission in Maryland was down to national levels. "From 1997 through 2008, Maryland hospitals experienced the lowest cumulative growth in cost per adjusted admission of any state in the nation," the state concluded in a 2010 report.
Rate-setting is not popular here. About 30 states implemented schemes similar to Maryland's in the 1990s but have since repealed them. The heavy-handed regulation proved unpopular, so states shifted toward managed care as a means of cost control.
There could certainly other factors at play: As Brill points out, for example, the American health-care system encourages higher spending by paying doctors a fee for every service they provide. Still, Americans actually go to the doctor less than residents of other countries, as the Commonwealth Fund found in an analysis last year.
The thrust of the piece, though, is all about prices. And that's one area where we know what a solution might look like. In a way, the success of rate-setting makes simple sense: When the government has the final say on how much a medical procedure costs, it's not that hard to hold down the price.