"as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit"

Food is more critical to life than medical care.

You are guaranteed to die after not eating for a few weeks. Yet  most companies don't have "employer food plans" and there is no outcry for "single payer food". Concern over ensuring  the poor can eat  doesn't lead Americans to suggest the government grow   food and run grocery stores and restaurants. Those in poverty are helped to eat through either private charity, government monetary assistance, or   vouchers for food (aka food stamps). The same methods used to ensure the poor eat can be applied to healthcare. If the government is going to help it can provide vouchers for private insurance  without rather than using the issue  as an excuse to benefit industry groups.
The former Soviet Union felt   competition was wasteful. They felt food was so important government had to produce it.  Obviously it turned out they were wrong and competition in a free market works far better. Healthcare policy in this country is more complicated than it needs to be since many don't apply that simple lesson.  That complexity hides favors for special interests that benefit at your expense.

Question: "How much does it cost?"  US healthcare: "How much have you got?" 

A "consumer price index" (CPI) compares how prices change over time. US medical prices  have increased as fast as average disposable incomemuch faster than other prices.

Top red line:  average per person disposable income (i.e. after tax income) starting in 1959 (the earliest data available).  
Middle blue line: CPI for medical care.
Bottom green line: CPI for everything aside from medical care.  

All values are  scaled to  start at 100 to allow comparison. Incomes and medical prices are almost 20 times what they were. We can afford 2.5 times more of everything than we had in 1959, on average, except medical care.  Medical costs behave far differently than the vast majority of our economy because government grants  favors to big corporations and politically connected groups. It protects them from the competition that keeps other prices in check. Most people have no idea how many ways the government prevents the healthcare market from functioning well. The only hope of fixing the system is for the public to take time to learn.

The amount we spend on healthcare has risen much faster than its price. We buy around 3 times as much medical care as we used to, taking into account the increased prices. Data from the OECD is available for 1960-2010:

We are spending a larger share  of our personal income on healthcare:

The share of income we spend "out of pocket" has   decreased over time because people are concerned with keeping their own spending under control. The rest of the money is spent by government and private companies and never directly passes through our hands. The government tries to shield us as much as possible from directly paying so we don't shop around to keep spending under control.  A "Healthcare Blue Book" shows the same medical procedure may be 5-10 times cheaper within the same geographic area. One  surgeon  reports a    package deal price on a particular procedure is $5,885 at one facility for all costs, while another charges $33,505 even before adding in physician and  anesthesiologist fees. High priced healthcare providers use the government  to limit the spread of   low cost options.

Government prevents competition to benefit existing providers

Imagine if Apple   needed to get government permission before launching a product and had been told  "other companies already sell cell phones, we don't need another one" or  "music players exist, the iPod isn't needed". " Imagine if Apple and the makers of IBM-PC clones had been told "IBM already makes computers, there are no need for others". Imagine Walmart, Office Depot, Best Buy and Whole Foods were told "we already have enough retailers". Yet

"In 36 states and D.C., it is actually illegal to offer new healthcare services or purchase certain kinds of medical equipment without obtaining special permission from the government. These laws—called certificate of need or “CON” programs—establish government-imposed monopolies of service for favored established businesses. Before new healthcare services may open their doors, they must first prove to the state that their service is “necessary”—which, all too often, is simply code for proving that they won’t take any customers away from an existing business."

For example, MRI machines are among the  many healthcare services  that require approval. A Virginia MD "
had no idea that his application for a new machine would turn into a five-year quest that would cost $175,000 in filing fees, consultant bills and attorneys expenses."  Existing providers use the political process to keep prices for   services higher by limiting competition, "certificates of need" are simply one of the easiest to spot.

Government limits the number of doctors to keep salaries up

The US is only 53rd in the world in the number of doctors compared to our population. That contributes to  rising costs  by keeping salaries higher. As USA Today explained: "The number of doctors is a political decision, heavily influenced by doctors themselves" because government limits the number of medical schools and residencies available. From 1983 until about 2008 the number of medical school graduates was about 16 thousand. Despite the population growing   by almost 1/3rd they only  increased the number  to 17,364 by 2011 after they finally admitted admitted there will befuture shortage:

"Whether considering the projection from the Association of American Medical Colleges (AAMC) of an overall physician shortage of more than 90,000 by the year 2020, or the 2009 report prepared on behalf of the Physicians Foundation put that number at 200,000 by the year 2025, it is not difficult to understand the fundamental reasoning behind these numbers"

Recent changes in healthcare make the shortage worse by inspiring doctors to work fewer hours and increasing paperwork load. A large survey of physicians reports   in 2012 they are each seeing 16.6% fewer patients than they did in 2008, and 22% plan to decrease their hours in the next few years. 

Many simple medical tasks don't require the expertise of a doctor and could be performed by a cheaper nurse practitioner. Yet the physician's lobby in many states prevents them from performing tasks they are trained to do, in order to protect doctors from competition. The New England Journal of Medicine reported that regulations were the key obstacle to making use of nurse practitioners and that:

"Research in Massachusetts shows that using nurse practitioners or physician assistants to their full capacity could save the state $4.2 billion to $8.4 billion over 10 years and that greater use of retail clinics staffed primarily by nurse practitioners could save an additional $6 billion"

Hospitals have even more political influence than doctors

Government pays  a higher price   for many procedures to hospitals than it does to individual doctors, often 2-3 times as much. Hospitals can handle  the increasing paperwork to comply with new regulations more efficiently than an individual doctor.  This has led a growing number  of  physicians to sell their  practices to hospitals. This  reduces competition and raises costs. As the Wall Street Journal put it "Same Doctor Visit, Double the Cost; Insurers Say Rates Can Surge After Hospitals Buy Private Physician Practices; Medicare Spending Rises Too". The Washington Post recently reported "the number of physicians who own their firms dropped from 57 percent in 2000 to 43 percent in 2009, and it’s projected to continue falling to 33 percent by 2013" and that "in 2002 about 20 percent of U.S. physician practices were hospital-owned; in 2008 that figure was over 50 percent". By 2014 a recruitment firm estimates over 75% of physicians will work for hospitals. WSJ said "nearly a quarter of all specialty physicians who see patients at hospitals are now employed by the hospitals. That is more than four times the 5% in 2000". Increased regulation helps hospitals more than it hurts them by reducing competition. Hospitals now own 27% of urgent care clinics. As the New York Times says of these growing hospital businesses:

"there are signs that the trend toward them is actually a big factor in the rising cost of private health insurance. In much of the country, health systems are known by another name: monopolies "

Most hospitals aren't for-profit businesses, yet they lobby against competition.

The US is only 43rd in the world in the number of hospital beds compared to our population, we are only at the global average of 30.   This article notes that Milton Friedman, winner of the Nobel Prize in economics, explained in 1992 that:

"at the beginning of the 20th century, about 90% of all American hospitals were private, for-profit enterprises. State and local governments then began taking over the hospital industry. So, by the early 1990s only about 10% of all American hospitals were private, for-profit enterprises. Socialism characterizes at least 90% of all hospitals. Many other hospitals have received government subsidies, and with the subsidies come reams of regulation... The effect of this vast government takeover of the hospital industry, Friedman documented, is what any student of the economics of bureaucracy should expect: the more that is spent on hospital care, the worse the quality and quantity of care become, thanks to the effects of governmental bureaucratization. According to Friedman, as governments took over an ever-larger share of the hospital industry (being exempt from antitrust laws), ...  cost per bed rose tenfold. "

Data from the American Hospital Association shows 20% of community hospitals are now for profit, though the average non-profit hospital has more beds.  Even non-profit and government hospitals  lobby to stifle competition since   managers in any entity like to build their own empires. Monopolies, private or public,   have less incentive to control costs.. 
Milton Friedman wrote that:

"Some years ago, I came across a study by Dr. Max Gammon, a British physician who also researches medical care, comparing input and output in the British socialized hospital system... He was thus led to enunciate what he called “the theory of bureaucratic displacement.” In his words, in "a bureaucratic system … increase in expenditure will be matched by fall in production. … Such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted’ production.”"

In a "concession to the powerful American Hospital Association (AHA), a supporter of Obamacare, which prefers to have its member hospitals operate without competition from hospitals owned by doctors" the "Section 6001 of the health care law effectively bans new physician-owned hospitals (POHs) from starting up, and it keeps existing ones from expanding." As a result of regulation "The number of physician-owned hospitals has declined from a high-water mark of about 275 before the ACA was passed to about 230 now". Less competition increases costs. The number of staff per hospital bed is now 11 times what it was in 1946 and still rising.

Harvard professor Regina Herzlinger  has written about the battles between healthcare companies and physicians who   use the political process to stifle competition:

"the AMA declared war on retail medical clinics, located in places such as CVS and Wal-Mart.... Congress imposed a moratorium on physician-owned, for-profit specialty hospitals in 2004, the AMA went all out to repel that threat."

Government protects insurers from competition at the expense of consumers

The battle against competition extends to the insurance industry as well. Professor Herzlinger has written there is far less innovation in healthcare because existing players prevent competition

"Entrepreneurs avoid health-care delivery because status quo providers, abetted by legislators and insurance companies, have made it virtually impossible for them to succeed.. Time and again the regulatory status quo blocks entrepreneurship"

Large companies fear losing business to new  companies with creative ideas to lower costs or improve quality. Many people don't realize existing businesses often benefit by having needless rules that are costly comply with.  Those rules make it difficult for a new competitor to start which would take their customers and cost them even more money than the regulations.  Corporations other than hospitals are prohibited from hiring doctors  in many states . That  is one of many factors inhibiting the spread of cheap retail medical clinics. The rules are meant to protect existing entities at the expense of the public. Herzlinger describes examples of   government being used by special interest groups to prevent competition from starting up and shut it down if it somehow does begin to thrive:

"They created a system to bring concierge medicine to the uninsured and the middle class. For $70 dollars a month, you get 24/7 access to a doctor. ...But the insurance industry charged that they were insurers and that they should be regulated the way insurers are regulated. Those words, insurance regulation, that's like striking a knife into the heart of an entrepreneur. .. I did a series of cases on a retail health clinic called Health Stop....Health Stop grew to be a $100 million company. But these guys were run out of business by the hospitals and by the community physicians who attacked them relentlessly."

The recent healthcare law changes continued the pattern of being good for existing companies: 

"Since Obama’s January 20, 2009, inauguration, Aetna is up 80%, UnitedHealth is up 127%, Humana is up 170%, and WellPoint, another large health insurer, is up 79%, all exceeding the 67% increase in the S&P 500 Index over the same period"

while  being bad for  competition

"Startup health insurer shutting.. The hotly debated healthcare reform bill signed into law in March has killed a local insurance company."

After reporting a couple of years ago that an "AMA Study Shows Competition Disappearing from the Health Insurance Industry", this years AMA report on "Competition in Health Insurance" says "anti-competitive conditions exist in 83 percent of the 368 metropolitan areas studied".  A Kaiser study of statistics regarding how competitive the health insurance industry is reported: "Only one state (Wisconsin) had an HHI index less than 1,500, indicating an unconcentrated (or competitive) market." Analysts say the health insurance market is "moving towards an oligopoly". Regulation benefits existing big companies. Increased regulatory costs are more efficient for a large company to bear. This leads to smaller companies merging or failing and helps prevent new ones from arising.

As one healthcare analyst put it:

"normal market forces have been completely suppressed. Health care in both places, therefore, is bureaucratic, cumbersome, wasteful, inefficient, and unresponsive to consumer needs. [...]In general, private insurance in the United States is so heavily regulated that it bears no relationship to what we would find in a free marketplace. Indeed, what we call private insurance in this country is little more than private-sector socialism.[...]

In competitive markets companies try to gain customers by lowering prices and wish to cut costs. An entrenched oligopoly  behaves differently and profit from a strategy of  not engaging in price wars that would cost them all money. Insurers usually benefit by simply passing along rising medical costs in the form of higher premiums (which includes a share for higher profits) since they know most customers will pay it. 

Obamacare tries to prevent insurers from reducing medical spending

One reaction many business people have to discovering   some healthcare providers are so cheaper than others is to wonder why  insurers don't e.g. offer a kickback incentive for people who shop around and choose a lower cost provider. It seems the potential profit would be enough or some insurer to decide its worth risking a price war. The lower medical costs would let them lower premiums while still making the same or greater profit. The lower premiums would bring in more customers. Unfortunately  government now works against that approach.

The public was told  insurers spent too much on overhead and profit so the government needed to ensure that most of their revenue went to paying medical claims. That justification is questionable since  a government report notes the "net cost of health insurance" (administration&profit) was the only part of the cost of premiums to  decrease between 2005 and 2009. It  was $4.5 billion/year lower.

 Obamacare requires insurers to meet a "Medical Loss Ratio" (MLR) which compares their spending on medical claims to the amount they receive in premiums. If they don't spend at least 80% of their premiums on  medical claims in the small&individual markets and 85% in the large group market they need to issue rebates to customers to meet that standard.  This provides incentive to restrict overhead&profit, but it also provides incentive for many to increase, or at least NOT decrease medical costs

 Another way of looking at it is they need to spend at least 4 or 5.7 times as much on medical costs as they spend on overhead&profit, otherwise they are breaking the rules and will lose money by needing to give a rebate.  They can't reduce medical costs much or they'll be punished by needing to give customers a rebate. They are allowed to increase profit if they increase medical spending and raise premiums. Examples illustrating this are in the appendix. 

The MLR is also a tool to protect existing insurers from competition since it limits the amount of money new and growing companies  can spend on sales and marketing to try to take their customers.  The Government Accounting Office (GAO) estimated that in  2010  57% of companies in the individual market wouldn't meet the ratio, nor would 23% of the small group market and 20% of the large group market. Those who meet the ratio may try to get it increased to drive others out of the market.  Its likely rising medical costs will be used as an excuse for the national MLR requirements to be raised, or state level standards since "under the ACA, states have the flexibility to set higher MLR standards".

The Obamacare site brags there were "$1.1 billion in rebates" this year, which is around 0.1% of total premiums. That was in exchange for an approach which reduces their incentives to control medical costs, i.e.  "penny wise and pound foolish". The concern over health insurance profits is odd since they are one of the least profitable parts of healthcare. From "2007 through 2010 the annual median net profit margin for the ten largest health insurance/managed care companies ranged from 2.1% to 4.4%" and in 2008 its profit ranked "35th out of 53 top industries" and by another measure "he profit margin for health insurance companies was a modest 3.4 percent over the past year.. 87th out of 215 industries and slightly above the median of 2.2 percent.".

Obamacare tries to prevent consumers from reducing medical spending

Insurance companies   profit by betting that on average they will spend less on medical care, profit, and overhead than you pay in premiums. Most people lose money compared to what they would pay on their own. They take the bet to cover potentially astronomical costs if case they do become very ill. Most  people can save money by paying for more medical costs directly and only making a bet through insurance that will  cover major medical expenses using a high deductible policy.  While sometimes $1,000 is called a "high deductible" you can get   $5,000-$10,000 deductibles and keep a healthcare savings acccount to cover most expenses. 

People   who  purchase their own policies discover they save money with a cheaper  high deductible policy. People who are spending their own money tend to be more cost conscious when they deal with healthcare providers and these "consumer directed health plans" may reduce total  healhcare spending by up to 30% over time or at least slow its growth. Data on consumer driven health  plans show "the total savings generated could be as much as 12 percent to 20 percent the first year".

Unfortunately Obamacare  bans many high deductible policie to help drive up insurance premiums. In 2014 the deductible can't be over $2,000   for a single policy, with higher caps for those under 30  and families (with possible adjustments for flexible spending plans, though it limits contributions to them).  The MLR requirements for Obamacare may either increase the the cost to use the less high deductible policies it does allow or drive them off the market.  An MIT economist who was an  architect of Obamacare now says it may increase premiums 19-30%.

Linking insurance to employment is a favor to big business and bad for the public

You don't have an "employer TV plan" that provides everyone the same TV. They pay   a salary and you decide how to spend it. Companies    provide health insurance as a benefit   because they get a tax break. That makes it cheaper for them to buy a policy   than to give you money to buy your own.  If the tax break were given to individuals instead of employers,   companies would just give you the money they now spend buying you insurance. You could buy a policy  best for your needs, rather than theirs.

 Couples could share   money to buy a better family policy.    Increased competition for a much larger individual&family policy market would force average prices to be comparable  or lower than they are now for policies tied to employment (since the amount they pay out in claims wouldn't change). Currently the individual market is a tiny  3% of the business and gets less attention since companies focus on the much larger employer based insurance market. Less competition leads to higher rates, which   hurts the unemployed and   self employed who have no choice but to buy individual policies. This makes it easy to keep your insurance if you are laid off or change jobs so there would be less concern over pre-existing conditions. 

 People  would pay more attention than employers do to factors other than  money when choosing an insurer. You likely care more than your employer about   an insurer's reputation for treating its customers well if they get sick. If  the entire market were  individual policies this would lead many insurers to compete partly based on customer service.

When someone decides what company to work for, they usually won't research the insurance company used . What most people unfortunately look at about is whether  the benefits sound good on the surface, which usually means  whether they have a  low deductible and/or low co-pay. Many companies offer such "good" polices to attract employees, which unfortunately costs  more  money overall.   Some employers allow you to choose a high deductible policy you combine with a healthcare savings account, but almost half don't offer them and only 7 - 13% - 31% of people were enrolled in one in 2011 (estimates will vary depending on whether the policy includes a healthcare savings account and what is considered a high deductible plan).  

Politicians  help   insurers by linking  insurance to employment since it leads them to sell more expensive lower deductible policies. That  benefits  healthcare providers who would rather you never considered price.  Big companies    negotiate better group policy deals than small companies. Big companies have an advantage trying to recruit good people because they can offer better benefits for the same cost. Tax breaks for employers to provide insurance are  a gift from politicians to big companies at the expense of small. Shift the tax break to individuals, then after the market shifts  to individuals repeal it and lower tax rates to compensate. Those who can afford better insurance benefit from it more than the less fortunate so it is a regressive policy.

Politicians and activists pushing single payer stifles insurance competition

Imagine if there were rumors the government might institute a "single payer food plan" and replace all restaurants with government run cafeterias in 6 months.  Would you go to the trouble to start or invest in a new restaurant? People will only expend   resources to start  a new business if there is a possibility they can make enough money to be worth the investment of time and/or money. 

There are people   with creative ideas for providing better  health insurance (or something to replace the health insurance model) such as those  professor Herzlinger referred to. Unfortunately there has been a fear for many years   the government might soon take over the health insurance industry. Many business people would think it far too great a risk to start or fund a health insurance related company. This benefits all the existing companies by preventing them from competition (as long as they keep single payer from actually happening). It takes several years to build a new business, and to sell stock in it after that you need people to believe the company will survive several more years in the future or they wouldn't want to buy it. The government needs to commit to not taking over the health insurance market to allow new innovators to come in and compete with the existing companies. 

The same problem exists to varying degrees in many healthcare related niches (like healthcare information systems) where fewer entrepreneurs start new businesses due to  fear   government will either take over their niche or change the rules so much their business either is no longer viable or it needs to  spend money to redo their product.  

State governments restrict free trade within the United States to help insurers

Competition is currently limited by almost all states prohibiting the sale of insurance across states lines. For other types of products you can buy a cheap product off Amazon or another provider over the net from any state, but you can't do that for insurance. Rather than letting you choose the policy that is best for you, many state regulators collude with insurance companies to require plans to cover many things you may not  need in order to drive up their cost or to benefit suppliers. It is estimated   these mandates may raise the cost of premiums by 30-50 percent, which means fewer people can afford the lowest cost plan in their state.  The Congressional Budget Office estimates that new mandates Obamacare adds to all states may drive up non-group premiums "nearly 30 percent".

 Large companies are able to be licensed separately in multiple states  after going through lots of costly and time consuming regulatory hurdles, which would be difficult or impossible for a new insurance company intending to sell via the internet to do. They still can only sell you policies that meet the perhaps expensive regulatory requirements in your state.   Imagine if when Apple were a tiny new company you hadn't been allowed to buy a computer from it  unless   it operated in the state you lived in and offered a special version of its products customized to your state. Its large enough to day to do things like that, but when it first began it wouldn't have been able to. Its unlikely the company would have found enough customers in just one state to grow the way it did. At the time it didn't have  the funds  to set up shop in every other state. Its doubtful it would have succeedd.

The Interstate Commerce Clause of the US Constitution was meant to guarantee  free and open trade between the states. That was one of the secrets of our success which e.g. Europe hopes to copy.  The clause could be used to force states to allow you to purchase insurance across state lines however it would take time for companies to begin to take advantage of it once it happens. It is too soon to assess any benefit from the few states that recently began  to open up their borders a bit. Its likely companies are waiting to be sure the laws won't be changed again, and are uncertain what other healthcare law changes might occur in the future so they may be hesitant to expand into new markets.

The government protects drug companies from competition. 

The Manhattan Institute points out:

"But the pipeline for new drugs isn’t drying up because the industry isn’t spending enough money developing new drugs (about $1 billion per successful Food and Drug Administration-approved drug), but because FDA requirements for drug development and approval have become enormously complex, time-consuming, and expensive."

This benefits existing large companies who can afford it at the  expense of innovative new startups  that can't. The situation has deteriorated over time. Data from the Tufts Center for the Study of Drug Development showed that "From 1999 to 2005, as the Tufts group has shown, the average length of a clinical trial increased by 70 percent; the average number of routine procedures per trial increased by 65 percent; and the average clinical trial staff work burden increased by 67 percent.".  the total cost to develop a new drug (inflation adjusted to 2005 dollars) rose from $393 million average for 1970-1982 up to $1,241 million during 1990-2003. A Forbes article notes adding in all R&D costs a more recent figure shows  $5.8 billion per drug approved (factoring in all R&D). 

They note elsewhere it can take over a decade to approve new treatments and since FDA approval is also required for new medical devices

"Venture capital for biotech is also being cut back, with investors citing an unpredictable and expensive regulatory process. American patients are also waiting longer for access to some new medicines and medical devices that have already been approved in Europe."

Although bureaucratic inefficiency is likely the explanation for many government delays, they do protect existing products from new competitors. The FDA has proposed making the process "more onerous". The Milliken Institute  reported last year  that the FDA's uncertain and lengthy process holds back innovation and limits the funding available startup medical devices:

"In Europe, many devices are approved in half the time it takes for similar approvals by the FDA... The average time for 510(k) products and (Pre Market Approval) PMAs has risen by 45 and 76 percent, respectively,since 2007"

  A prominent cataract surgeon recently noted FDA stands for "For Development Abroad" and   many companies with products approved in  Europe are "abandoning the goal of FDA approval entirely" due to time&expense so we'll never get them.   A paper from the Progressive Policy Institute on "How the FDA Impedes Innovation: A Case Study in Overregulation" wonders if the first Apple computer would have been launched if it had to go through the equivalent of FDA approval. It says of a recent product undergoing scrutiny:

"If the FDA fails to approve, Melafind, it would be the equivalent of rejecting the first cell phone on the grounds that callers might mishear important messages"

Slower approval of medical innovation helps existing products but costs lives

 There are concerns  the FDAblocked approval of digital mammography machines for several years last decade". A Wall Street Journal piece  on "The FDA's Deadly Track Record" talks  about the vast numbers of people who die waiting for approval of new treatments. Millions of lives have been saved by insulin, yet Stanford's Hoover Institution published an article pointing out that today's regulations would have impeded its development and that:

"I have attended countless meetings of doctors and research scientists in which the role of the FDA was discussed. The uniform view is that the FDA slows down medical progress by about three to five years. These doctors, however, are not willing to state this publicly for fear of administrative revenge"

The same professor more recently noted there is a "wealth of evidence against the FDA’s dangerous worldview".Doctors from the American Council on Science and Health pointed out a couple of years ago that more stringent FDA regulations squashed innovation in antibiotics:

"In successive four-year periods beginning in 1983, the number of new antibiotics approved has dropped from 16 (in the period from 1983 to 1987), to 14, 10, 7, and 4 (in the period from 2003 to 2007). And it’s getting worse, not better: only two since 2007."

Last year the Wall Street Journal explained  shortages of important drugs were partly due to the fact that "It takes as long as two and a half years to receive FDA manufacturing approval for a generic" so new companies can't quickly step in to fill the demand. In free markets when there is a shortage prices rise, which inspires new companies to step in. In this case   government has  kept prices low for existing generic drugs.  That ensures  there isn't enough profit potential for other companies to spend the time&money to be approved. That lets existing manufacturers time to ramp up production without competition getting there first.

Government protects lawyers&insurers preventing reform of the malpractice system

Studies show  91%-93% of physicians say doctors practice "defensive medicine" by ordering more tests&procedures than they think needed to avoid claims of malpractice. This doesn't happen in other countries, with one study of physicians in a few other countries showing only 8-14% of them had heard of defensive medicine.The impact this has on costs is wildly disputed, with figures ranging from $13 billion to $46 billion to  $60 billon to $76-$126 billion to $191 billion to $210 billion to $270 billion to $650 billion to $850 billion.

In comparison only $6 billion in total compensation  was received by patients in 2011. It was paid for our of $31 billion in direct costs for medical malpractice. It seems likely a more efficient system can be created, given that the payments to patients were 22% of the costs while legal costs were 36%. Profits were 31% of those costs and "The average profit margin for the top 10 medical malpractice insurers was twice as high as the average profit margin of the 50 most profitable Fortune 500 companies". This suggest the likelihood regulations deter the creation of more competitively priced insurers,or that new startups are scared off by the prospect of uncertain future reform of the system.

 Another page reports different figures of 17.5% "received by patient" and 17.5% "attorney fees and litigation costs" which perhaps only reflect legal costs of one side.  72% of claims close without a payment to the patient, and 93% of juries side with the doctor. Some estimate  "90 percent of legitimate medical injuries are not properly compensated. That leaves many patients - especially the poor, minorities and elderly - without the compensation they desperately deserve".

The current "jackpot justice"  system is broken from the perspective of most except lawyers and malpractice insurers who benefit. Its likely there are creative approaches entrepreneurs  would invent ways to improve the system if laws enshrining the current approach were changed. Politicians have kept the current status quo system intact for decades despite talk of the need for reform. This seems likely due  to infighting of the various stakeholders  who wish to legislate a system that benefits  themselves, in addition to the politically connected     trial lawyers and malpractice insurers trying to keep their profits.

The cost of routine care is driven up by requiring insurance to cover it

Most people consider toothpaste a  regular part of their personal care. They are cost conscious when they buy it, most wouldn't pay $70 for a tube of toothpaste. Yet if toothpaste were required by government to be  covered by insurance without a deductible, people wouldn't pay attention to costs and the manufacturers could raise prices.  It would add extra overhead to run   each toothpaste purchase through the insurance company. The higher prices would lead to higher insurance rates for everyone since everyone would take advantage of it. If you have a regular predictable expense, it makes little sense to add extra overhead to involve an insurance company. Insurance is meant to cover unexpected events. Providing "free services" leads to costly overusage: "The bottom line is that thousands of people randomly given free medicine in the late 1970s consumed 30-40% more medical services, paid one more "restricted activity day" per year to deal with the medical system, but were not noticeably healthier! "

The providers of goods and services lobby to get regulators to require coverage of their products by claiming they are doing so in the interest of the public and that regular preventative care saves on costs. In reality they wish to be able to raise costs.  If a preventative care measure does save costs,  if were a real competitive free market for insurance then companies would make rational decisions to do things like offer discounts for those those that  use    preventative care so they are more likely to do so. Financial incentives can lead people to take better care of themselves.  Wharton business school reported on studies showing "One Way to Lower Health Costs: Pay People to Be Healthy" saying "Health costs as little as $3 a day. At least, that's all it took in one recent study for several patients to forgo bad behaviors that put their health at risk.". They might offer discount coupons for preventative care products which are paid for by providers as a marketing expense just like coupons are for retail products.

These are all just tip of the iceberg examples of government driving up costs

Anti-competitive policies are widespread in the industry and  you'll never hear about most of them. Government intervention increases prices in many other ways. Obamacare established over "100 new committees for lobbyists to jostle for handouts from Uncle Sam.". Logrolling to gain votes to pass the bill kept adding favors for certain players, while those who didn't play ball well enough were punished. In other cases they were hit with taxes or regulations that appear to be punishment.. but prevent existing players from losing even more money to new competitors . Increasing taxes on healthcare won't reduce its cost. Yet a list of taxes included in Obamacare includes:

"4. Tax on Innovator Drug Companies ... 7. Medicine Cabinet Tax ...12. Tax on Medical Device Manufacturers ...13. High Medical Bills Tax ... 14. Flexible Spending Account Cap – aka “Special Needs Kids Tax" ... 19. Tax on Health Insurers ... 20. Excise Tax on Comprehensive Health Insurance Plans"

The Wall Street Journal reports the   medical device tax has already led companies to reduce R&D, lay people off and cancel expansions. They may have lacked political clout because "Eighty percent of device companies have fewer than 50 employees". Of course some existing businesses favor the tax since it deters new competition which might cost them even more.  Fewer people will be inspired to start new companies because the tax "could consume more than 65% of a typical company’s profits". Even Democratic Senator-elect Elizabeth Warren recognizes 

"When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential. It also pushes companies of all sizes to cut back on research and development for life-saving products"

Perhaps 45,000 jobs might be lost in the US. A Forbes column points out  reductions in R&D lead to fewer new devices so patients may die earlier. It  gives estimates that

" the tax will lead to a reduction in research and development by about $2 billion every year... effect of the tax will be about one million life-years lost annually." 

Obamacare also rewarded the more politically connected older crowd by shifting costs onto younger people. Insurers usually charged 6-7 times as much for older people but starting in 2014 they can only charge 3 times as much which is estimated to increase the cost to the young by 17%. They made sure to still keep the college activist vote by letting them stay on their parent's policies until they are 26.

MIT economist Amy Finkelstein in 2007 "published a paper estimating that the introduction of Medicare accounted for a 23 percent increase in total hospital expenditures between 1965 and 1970, with an even larger effect in the subsequent five years. ".

Government hides the true cost of some programs by postponing them

Businesses need to plan to have enough money in the future to pay for  benefits. Their stock price is based on their future potential to make a profit. In contrast, politicians often make promises for future benefits that exceed the money they will have to pay for them to win votes with money they don't have. 

When a program proposes to pay out more in future benefits than the money it takes in to pay them they have an unfunded liability. The "present value" of an unfunded obligation is how much you would need today in an account earning interest to cover future payments. The US Treasury department's annual "Financial Report of the Federal Government" most recently estimated the present value of the unfunded liabilities for Medicare at $38.8 trillion. The is about $123 thousand per person in the US. Just two years before had estimated a value of $89.5 trillion, about $285 thousand per person. It is unclear if the figures have gotten more optimistic, despite the slower than expected economy, due to real improvements or due to political pressure.  Medicare's own Chief Actuary stated in the most recent Trustees report that 

“the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range…or the long range.”

Government healthcare insurance is inefficient, politically influenced, and drives up private prices

 .Government programs overpay some politically influential providers.  Then they  need to underpay other healthcare vendors. Although the healthcare system wastes money, government bureaucrats don't really know which  costs can safely be cut and may reduce payments for the wrong things.  31% respond  of doctors respond by not accepting new Medicaid patients, and the AMA says 17% don't take new Medicare patients (31% of primary care doctors refuse them). A survey shows 52% have either limited the Medicare patients or plan to do so. 

The ones that do take government funded patients make up the loss in some cases by cutting the quality of care leading to higher death rates. Others cover the shortage by raising rates for private patients. A study based on 2007 data (it would  be higher today) estimated this  raised the cost to private patients by $90 billion extra, raising average spending for a family of four by $1,788. As more people use government healthcare programs the cost shift will increase, leading more people to need to drop private insurance and get government help.

World Bank report explains the efficiency of any insurance entity  starts dropping when it gets too large. In any industry private companies that get too large become wasteful due to "diseconomies of scale". A lack of competition leads insurers to be wasteful, but a government program without fear of competition is even worse. Programs   become bloated slow moving dinosaurs that are so big they fail.  The New York Times reported

"Doctors are paid not by how much time they spend with patients, how well they listen or how hard they think about what could be wrong, but by how much they write down. And the rules for what we have to write are Byzantine: Medicare’s explanation takes 87 pages. "

Large programs become too bloated they develop all sorts of unintended problems, as this health care blog points out:

"Under Medicare’s payment system, however, a specialist can only bill Medicare the full fee for treating one of the five conditions during a single visit. If she treats the other four, she can only bill half price for those services. It’s even worse for primary care physicians. They cannot bill anything for treating the additional four conditions."

Government programs pretend to be more efficient than they actually are by e.g. not spending as much to deter fraud. That simply means they pay more out in fraud costs, which they admit but try to downplay. The New York Times and Health Affairs reported   the goverment's  Centers for Medicare and Medicaid Services  estimates $65 billion in Medicare&Medicare improper payments were made. A study in April 2012 by a former CMS administrator and a RAND analyst put fraud and abuse cost higher at $98 billion in 2011, which is around 10% of their cost in contrast to private insurers estimated "1 to 1.5 percent" fraud loss.

Even without including fraud, Medicare's administrative overhead is higher per person. Thats without adding in other "hidden administrative costs" such as tax collection they offload to other parts of the government, and not taking into account the taxes insurers need to pay but government doesn't. Government programs also increases costs for healthcare providers to deal with more bureaucratic regulation and paperwork such as: "the huge cost of contending with 130,000 pages of Medicare regulations is pushed onto the providers"

More spending by government doesn't lower prices

Many people complain that healthcare costs more in other countries and mistakenly assume that handing more of the system to government will somehow reduce costs. Yet government already spends about  half of all healthcare money, 49% to  cover just 31% of the population. While prices have been rising, the percentage of healthcare spending done by government spending has been growing, while the "out of pocket" share which inspires people to price shop has fallen:

Even ignoring the costs it shifts onto the private sector and into the future, our  government already spends more than most other countries per capita on healthcare even though it is paying a smaller fraction of the total spending. This is 2009 data from the OECD for   major countries:

The uninsured are a minor part of the costs

This article began by noting that massive government intervention into healthcare isn't needed to address the problem of providing healthcare to the uninsured. They could helped either through private charity or if the government is going to be involved, then through vouchers for private insurance. It is worth noting that they also aren't a major part of the healthcare cost problem. A government approach doesn't eliminate the costs, it merely shifts them or at most reduces them slightly if they get regular care rather than  more expensive emergency care. They are a small part of the costs in comparison to the overhead the new law added:

Though supporters claim the mandate will reduce cost shifting from uninsured free riders to the insured, the latter will see no savings. Researchers at the left-leaning Urban Institute estimate that in 2008, such cost shifting amounted to just $56 billion, or 2% of total health spending, and increased premiums by "at most 1.7 percent." For comparison, the Dartmouth Institute for Health Policy and Clinical Practice estimates we waste more than 14 times that amount on unnecessary care. More important, the Commonwealth Fund study shows the federal law has already increased premiums by more than the mandate could reduce them by eliminating free riding.

This has little to do with the real cost problems in healthcare. They represent a small slice of the healthcare spending pie. It doesn't address the  factors that lead to making that pie constantly bigger.  Addressing an issue that will  say grow  healthcare costs  by X% per year and will eventually double costs has more of an impact on costs than something which is say 2% of costs even if it might rise to 5% of the costs.  The number of insured people has been increasing at a steady rate which may not have even been  been effected much by the law so far, it appears to be merely be recovering from a small dip during the recession:

Prices rise slower or drop in more competitive markets

The government has a consumer price index for "information technology, hardware, and services" that starts at the end of 1988 which provides a useful contrast with some other prices:
Competition keeps costs for apparel and vehicles restrained and  lowers computer related prices. Price increases are bad for business since customers go to competitors or  stop buying entirely. Companies constantly look for ways to be more efficient to lower their costs to gain more customers (or more profits until their competitors lower their prices). If a computer chip company finds a less expensive material to use and  lowers their price, then a tablet computer that uses that chip can lower its price. Price changes happen "bottom up" because someone actually found a way to reduce costs.

Government programs that try to control costs do so by arbitrarily deciding what price to set for something. The problem is they don't know what the price really should be since they aren't the ones actually producing  the end product or  the parts that go into it. If a government employee wanted to set a new price for tablet computers they wouldn't have the information they need to do it. They have no way of knowing that  some creative person at a computer chip company could find a way to use a new material and lower the price. If the bureaucrat said you must charge $X for all tablet computers, it is likely that won't match the price a free market would have set for them. If the price is   too high,   we would be paying too much and wasting money. If its  too low, many companies may say "its not worth it, we won't make a tablet computer". Obviously if the price were set to $1000 we would be wasting money. If it were set to $10 no company would sell a tablet computer. At a  price of $50 then some companies might sell  lower quality tablets, but none would sell a high quality tablet. 

Economists object to price controls as engaging in wishful thinking that you can accurately set prices "top down" by guessing how much it really costs to produce something. Some estimates will be high and money will be wasted. Others will be low, leading either to shortages or lower quality products. Since government price setters really can't provide a logical reason justifying what a price should be, there is potential for the arbitrary choice to be influenced by political factors. Companies will have incentive to use lobbyists and  connections to try to get their prices raised while the less politically connected see their prices lowered. "Single payer" government healthcare programs exhibit all the failings of any other price control system. 

Health care policies run counter to basic economics

Politicians often  pretend they are acting in the public's interest when they enact healthcare policies even when the ideas are so counter to basic business&economic sense they would  lead to non-stop laughter if they suggested  a mostly free market like the computer industry adopt them. Unfortunately it can be difficult to isolate all the factors involved in costs so they manage to create flawed rationalizations that fool the public since they don't pay close attention. Most people are more interested in other topics so they  don't know much about economics.. Unfortunately they may also be confused by hearing people who are supposedly "experts" push questionable policies.  The problem is that not all "experts" truly are. Some are pushing views which benefit their industry.

Nobel laureate economist Ronald Coase  recently critiqued many economists as being out of touch with the reality of the business world : "Saving Economics from the Economists [...] Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate." Nobel laureate economist Hayek's nobel  lecture discussed the "Pretense of knowledge" and pointed out that "Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones." Sometimes those that narrowly focus on a set of data may exhibit a "pretense of knowlege" about the topic, but lack e.g. an   understanding of the competitive entrepreneurial business world to grasp their data may not take into   account important factors such as that government intervention   means the market they are looking at isn't truly an entrepreneurial free market and shouldn't be analyzed as if it were.

Unfortunately many niches of social science, including some within econmics, are more prone to this problem than more "hard science" disciplines where there are usually more clear cut ways to use experiments to let reality resolve disputes. Nobel laureate physicist Richard Feynman referred to these areas as being "cargo cult science" which mimic the trappings of real science but which lack a certain willingness to be skeptical of their own preconceptions. .

  Some healthcare economists genuinely believe in these policies that run counter to the rest of economics. The   theory of "paradigm shifts" in intellectual disciplines acknowledges that the advancement of knowledge in any field is a human process which can at times be dysfunctional. Certain ideas (like "competition is wasteful") can become entrenched in a field even in the face of compelling counter evidence, and not be overturned until the current experts are replaced by younger ones.  Unfortunately that can be difficult since upcoming students get to pick what area they go into. Those who are skeptical of the status quo in a discipline may be motivated to work in a different niche rather than try to buck the establishment. In every human task area there is a wide range of talent. Some people can be major league athletes, and others aren't and don't try to compete with them. Those less who are skilled at a particular intellectual area may drift towards the leading edge work in   a niche with other "major league" players rather than towards a niche that seems to be stuck in the past. In this case there are also monetary rewards that inspire some healthcare policy specialists to back viewpoints favorable to industry, not all researchers are motivated by finding the truth of an issue. 


To illustrate the problem with Medical Loss Ratios, consider the example of a small group insurer that exactly  met the 20%  ratio with $100 million in premiums. It spent $80 million in overhead and $20 million in profit. Lets say next year it has the same number of customers who require the same amount of medical care, and consider what would happen if they changed their spending on medical costs or overhead. Case "a" in the chart below is where they are at now.

Case "b" shows the claimed intent of the law to prevent too much overhead&profit. If they tried to increase   profit by $5 million and raised   premiums to cover it, it wouldn't work because they'd  need to rebate the increase. They'd be violating the rules since their MLR only allows them $20 in overhead for that much medical spending.

In case "c" they tried to do a positive thing by reducing medical costs by $5 million and passing the savings along by reducing premiums, while keeping their profit and overhead the same. Unfortunately this would drop their MLR so they would be punished if they did this by needing to pay a rebate to customers. For $75 million in medical spending they are only allowed $18.75 in overhead&profit, so they'd need to  lose $1.25 million in profit to meet the MLR. 

Case "d" illustrates what might happen if they gave customers a kickback to choose lower cost providers. The customer incentives effectively reduce premiums by $5 million, and it leads to $10 million in reduced medical costs (note: these $ figures are chosen to illustrate the point and aren't estimates of what the real world figure might be) . Customers benefit, and they make more profit which is what inspires them to do it in the first place (though   part of the $5 million extra they spend goes towards implementing the kickback program). Unfortunately if they tried this they would be punished for breaking  the rules since they are only allowed $17.5 million in overhead for that much medical spending (not $25 million) so they'd wind up earning less money instead of more.

Case "e" illustrates a way for them to meet the MLR and make $5 million more in profit. They pay higher medical costs and use that to justify a premium increase, slipping in some more profit while at it and telling the public "we are meeting government guidelines for a reasonable profit". In competitive markets companies hesitate to raise prices for fear of losing customers, but in most non-competitive insurance markets its likely they will all accept the cost increases from providers and pass them along.