David Dodge on Why Health Care Costs So Much

by Trudy Lieberman

We know that the U.S. has the most expensive health care in the world. But beyond noting that dubious achievement, we seldom ask why. On my recent visit to Canada as a Fulbright scholar, I stopped by to pose that question to one of their leading health care experts, David Dodge, an economist who has served as federal deputy health minister and seven terms as governor of the Bank of Canada.

Right away he focused on the health care cost dilemma facing both our countries. “Medical technology is fascinating in that it is like consumer electronics in generating new products at a prodigious rate,” he said. “We’re on the verge of another burst of new products when we learn how to use genetic data.” It will change medicine, Dodge said, and will be a “quantum leap” into the unknown in the next quarter of a century, both medically and financially.

Nonetheless, Dodge quickly drew a distinction between medical technology and consumer electronics. While the health care industry continues to pump out new products, they cost more than the old ones, but the price of the old technology doesn’t come down as it has with consumer electronics like computers and television sets. “Why hasn’t the price of cataract surgery fallen by 90 percent with the introduction of new laser techniques?” Dodge asked. “The price has fallen a little, but not much. You used to be in the hospital two weeks for the surgery. Now it takes ten minutes.”

Dodge threw out a possible explanation: “Perhaps something is wrong with the economic mechanism.” The market doesn’t seem to work. Maybe health care is different from other goods and services. He brought up another example: In Canada, geriatricians are the lowest paid medical specialists and yet there is enormous demand for them, he explained. If the normal forces of supply and demand were working, high demand might raise the price for their services. That’s the explanation the oil industry gives when gas prices rise.

Our conversation that day in Ottawa didn’t produce definite answers. Dodge speculated that maybe health care markets don’t work because patients usually don’t feel the pain of paying their bills directly. In Canada, provincial governments pay them. In the U.S., Medicare, Medicaid, or employer-based health insurance pay most Americans’ medical bills.

He also suggested that self-regulation of the medical professions in both countries might partly account for the lopsided supply and demand equation when it comes to physician payments. “Governments understandably don’t want to take on the self-regulatory aspects of the professions,” Dodge told me. In other words, they don’t want to interfere too much with the prices professionals charge. In Canada, as in the U.S., most doctors receive fee-for-service payments. In Canada, though, the government may negotiate more forcefully with professional associations.

Patients are also somewhat to blame for the cost conundrum. Dodge noted that most people want to be treated by doctors rather than lower-cost nurse practitioners; when something is wrong they want to talk to doctors directly rather than someone else, even if that person can manage their care just as well.

And most people want the new (pricey) technology that promises the latest and greatest cures. My conversation with Dodge reminded me of the news in early December when the FDA approved a new drug for hepatitis C, a disease that’s hard to treat and plagues some 170 million people worldwide. A three-month regimen of the drug Sofosbuvir carries a price tag of $84,000. That’s $1,000 a pill.

Last week, NPR explored the high cost of that drug and questioned why it was so expensive given the huge market and likelihood that the drug maker would quickly recoup its initial investment. When NPR correspondent Richard Knox noted that experts suggested the price could be lower, a vice president for the drug company replied, “That’s very unlikely we would do that.” In other words, the drug maker simply didn’t want to lower its price.

Those high health care costs? Something besides market forces is at work.

Trudy Lieberman, a journalist for more than 40 years, is an adjunct associate professor of public health at Hunter College in New York City. She is a long-time contributor to the Columbia Journalism Review and blogs for its website, CJR.org. As a William Ziff Fellow at the Center for Advancing Health, she contributes regularly to the Prepared Patient Blog.

This article first appeared on the Prepared Patient Blog at cfah.org.