Charles Silver and David A. Hyman, Overcharged: Why Americans Pay Too Much for Health Care, Cato Institute, 2018.

It would be hard to believe all the outrages described in Overcharged if public information and personal experience didn’t back them up so much. We all know that medical costs are skyrocketing. This book goes into many of the details and provides a comprehensive explanation.

A number of my experiences make more sense in the light of what I’ve read there. One time a full surgical team, including an anesthesiologist, showed up for a procedure to remove a routine sebaceous cyst from my scalp. I had already said I didn’t want general anesthesia, and I continued to refuse it. I’m sure he got paid anyway. Fortunately, I had very good insurance at the time.

Another time I underwent a biopsy for prostate cancer because of elevated PSA. It turned out negative. I had recently had a bladder infection, which is a common cause of high PSA, but the doctor didn’t care that it was most likely a false positive. I won’t go into how disgusting the prep, the procedure, and the aftereffects are. Once I sued a doctor for overcharging, only to learn that in New Hampshire, you can’t sue a doctor in small claims court without an expert witness. (At least that was what he told the judge, and she didn’t contradict him.) In terms of practical economics, that means you can’t sue a doctor in small claims court. We all know that the very idea of getting a price or even an estimate in advance for a medical procedure is a joke, even though it’s expected for any other big-ticket expenditure.

Overcharged spares no one: not the doctors, the hospitals, the insurance companies, or the government. However, it blames the government as the root cause and the insurance system as the method. As far as the health care system is concerned, the patients aren’t their customers. The insurance companies are. Some people don’t have to worry about costs, because their insurance covers it all. Those who have high deductibles or no insurance can’t get an answer for what a procedure will cost.

Perverse incentives

Providers get paid for the treatments they perform, not for curing the problem. They’re rewarded for performing unnecessary procedures. If the patient gets sicker, they make more money treating the new issues. Insured patients have to deal with the risk and inconvenience of these treatments, but they don’t see the costs, except as a cryptic “explanation” of benefits with mysterious codes. “The real villains,” write the authors, ” … are governmentally administered compensation arrangements that cause the interests of providers and patients to diverge.”

Government agencies acting as insurers are the worst offenders. For a while, the authors report, Louisiana’s Medicaid program was paying $928 per IV bag for dextrose solution. For sugar water. A doctor in Michigan issued fraudulent diagnoses of cancer and subjected patients to chemotherapy to boost his income. He got a sentence of 45 years, but only after enriching himself through Medicare for years.

Doctors have incentives to prescribe unnecessary and useless medications. Patients often get prescriptions for antibiotics for colds and influenza, even though they’re no more effective than sacrificing a goat. To some extent this is because patients want them, but it’s also because doctors get more from insurers when they prescribe medication. This actually has a negative effect on health, since it promotes the emergence of antibiotic-resistant bacteria.

Many people get medical insurance from their employers, so even the cost of insurance is invisible to them. They don’t see the rising cost to their employer, which contributes to stagnating wages.

Government-granted monopolies

Patents are a major reason for high drug prices. When used properly, they give the creators of medicines a chance to recover the costs of their research and development. However, various tricks let companies get unearned monopolies out of them. “Evergreening” is the filing of an additional patent on some aspect of an invention, well after the clock started on the first patent. This gives additional years of control. The most outrageous source of abuse is the FDA’s granting of monopolies on well-established treatments to a company that officially demonstrates they have medical value. Endo got the exclusive authority to sell ordinary potassium chloride (KCl) this way. Naturally, it immediately jacked up the price.

The authors don’t propose a pure libertarian approach to fixing existing problems. In this case, they suggest partially replacing patents with a prize system run by the government. That would seriously politicize the research process, as researchers would aim to please the prize issuers rather than the market. It’s hard to say if it could make a bad situation even worse, but I can’t imagine it making it better. Reforms to eliminate evergreening and the elimination of monopoly awards on existing medications would help.

Medicare for all: A sadist’s dream

Before reading the book, I wondered if the people who advocate “Medicare for all” ever had to deal with it. I’ve been paying for decades for Medicare. Now I have to pay a premium for the insurance I’ve supposedly already paid for. I pay two more premiums for insurance to cover its inadequacies. But according to the book, I’m statistically getting a good deal. On the average, the government pays a lot more per Medicare recipient than the recipients pay in over their lifetimes.

Obviously — except perhaps to Bernie Sanders — this couldn’t be sustained if everyone were on Medicare. We couldn’t have a medical Lake Woebegon where everyone collects more than they pay.

Not all the money Medicare gives out benefits the patients. The authors estimate that a third of its budget goes to fraud, waste, and abuse. Sanders cites Medicare’s low administrative costs, but having an inadequate budget to stop fraud is a defect, not a virtue, of the system.

Going abroad

The book discusses the advantage of going to foreign hospitals, especially in India, for some procedures. The quality is excellent if you pick a good hospital, and the cost is less than having the procedure in the United States, even counting the costs of travel. The authors agree with most observers that medical care is less expensive in just about every other developed country than it is in the United States.

I wish the book had gone into why this is the case. What is the United States doing especially wrong? Perhaps one cause is the patent system, which regularly makes medications far more expensive here than in other countries. Perhaps it’s the pretense of having a “free market” system. What we have is really a crony system that lets private parties charge money without the accountability that’s expected in any other business. There’s a brief mention of Singapore’s “Medisave” system, which looks significantly better and less socialistic than Medicare. It still forces people to pay, but the money goes into their own accounts, which can be used only for health care.

Hope for improvement?

The Democrats tell us that what’s needed is a monopoly (“single-payer”) insurance system. The Republicans have no coherent answers at all. Still, the authors give some reasons for hope. They’re most encouraged by the increasing range of medical services that are available through retail services. You can go into a pharmacy and get a flu shot for very little. Competition brings prices down and keeps quality up. But if you need your gall bladder removed, CVS isn’t an option.

I find it hard to share the authors’ optimism. The prevailing political views seem to be divided between keeping the status quo and further increasing the separation of payments from beneficiaries. A lot of people think that the things which make health care so expensive just haven’t gone far enough, and that if they’re pushed further, then they’ll get all their medical bills paid for by somebody else. Of course, there always has to be a “somebody else” to pay the bills.

If nothing else, Overcharged helps in understanding why the system is so horrible. The main cause, as the authors argue and I agree, is that we’ve been pushed into using insurance for all medical costs, including routine, predictable ones. Imagine what car repair shops would charge and insurance would cost if car insurance paid for oil changes. But people demand insurance coverage for contraceptives, which means being “insured against” having a healthy body capable of bearing children.

You’ll find a lot to be angry at when you read Overcharged. It’s valuable information, but watch your blood pressure. You can buy it from the Cato Institute or from most book dealers.