How Bureaucracy and Big Government Ruined American Health Care

The price system works. Our health care system does not.


Among the many maddening things about the American health care market, few are so exasperating as its baroque and opaque pricing. The typical hospital bill makes the untranslatable Voynich manuscript seem like a child's grade-school reader by comparison.

Such complexity is partly owing to a simple fact: Much of the market is managed by huge, bureaucratic organizations that employ thousands of people to do nothing all day but grind through minutiae. This leads to things like the ICD-10, a diagnostic coding system that governs the classification and reporting of diseases and injuries.

With 16,000 different codes, the ICD-10 gets rather specific. Was the patient struck by a turtle? Enter code W5922XA. Was she struck by a sea lion? That's a separate code—W5612XA. Code S30867A covers nonvenemous insect bites to the anus. There's one code for assault with a hockey stick, another for assault with a baseball bat. And then there is V91.07XA, for patients who have been burned by flaming water skis. (Burned by flaming water skis a second time? That's V91.06XD.)

American health care providers must update from ICD-9 to ICD-10 this year. It says so right in the Federal Register, under a rule titled "Administrative Simplification."

Drug pricing represents another area that seems to have been designed by a circus clown on quaaludes. Most products drop in price over time as new and better ones come on the market. Not so for some drugs. Take Avonex, a prescription drug for multiple sclerosis. According to a piece in Bloomberg Businessweek, prescriptions for Avonex have been declining—while its price has more than doubled. The price for Gleevex, a drug used to treat leukemia, has risen from about $118 per pill seven years ago to more than $300 now.

Indeed, prices for numerous drugs have shot up in recent years by twofold, fourfold and even more. And that doesn't even count new wonder drugs such as Sovaldi, the life-saving hepatitis drug that costs $84,000 for a 12-week course, or Kalydeco, a treatment for cystic fibrosis that costs more than $300,000 per year.

There are various explanations for such eye-popping charges. Pharmaceutical companies spend billions of dollars a year on research, and they need to recoup that money. If they don't, then the stream of new wonder drugs eventually will dry up. But R&D is not the sole explanation, especially regarding those drugs whose prices suddenly jump after they've been on the market for years.

Other factors include pharmaceutical industry consolidation, which leads to larger companies with more bargaining clout, and a federal law, much in need of repeal, that prevents one of the largest market participants—Medicare—from haggling. Confronted with a useful drug that carries an outlandish price, Medicare has two choices: take it or leave it.

Then there's the patent-and-exclusivity system, which allows drug companies to recoup the costs of developing a drug by granting them exclusive sales rights for only a limited time. The exclusivity period for orphan drugs—those created to address rare conditions—lasts only 7 years, for example.

In 2013, drug companies lost more than $19 billion when patents expired and competitors started replicating various treatments. By a remarkable coincidence, the industry collected $20 billion by marking up other prescription drugs.

Sky-high prices present a serious dilemma: How much should people pay, or be forced to pay, for life-saving and life-changing treatments?

Insurance spreads the cost around. For run-of-the-mill prescriptions, co-payments usually constitute a fixed dollar amount, such as $25. For some advanced and expensive drugs, insurers have been asking policyholders to pay a percentage, such as 25 percent. For a drug that costs thousands of dollars, that can put a big dent in the patient's bank account.

According to some, there oughtta be a law against that. And in a few states, such as New York and Vermont, there is. Del. Jennifer McClellan would like Virginia to have one, too. The Richmond Democrat has introduced a bill that would forbid insurance companies to charge more than a $100-per-month co-payment for such specialty drugs.

This seems an odd way to go about addressing the problem of high drug prices, which is not caused by insurance companies. In fact, the legislation is likely to make the problem worse, not better, by hiding the true prices of the drugs instead of bringing them down.

Like the flat rate at an all-you-can-eat buffet, flat co-payments are an invitation to overconsume. A patient asked to pay 10 percent of a drug's price will object if the price doubles. But a patient who pays no more than $100 regardless of the price won't care.

What's more, pharmaceutical companies often know they can jack up prices without fear that insurers will drop coverage for a particular drug—because Obamacare requires prescription-drug coverage, and each state sets the formulary determining which drugs must be included. That robs insurance companies of bargaining leverage against drug companies. Allowing insurers to choose what they cover would help solve the drug-price problem.

Proponents of McClellan's bill say people shouldn't have to choose between paying for medicine and paying for food. That's like saying people shouldn't have to choose between paying for clothes and paying for shelter. It sounds high-minded, but it ignores economic reality.

Capping co-payments doesn't lower prices one cent—it simply forces some people to pay more so others don't have to. In the process, it renders the health-care market even more opaque and obscure.

They should have an ICD-10 code for that, too.

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  1. That picture of Obama with the white coated doctors is one of the more sickening political photo ops in recent years. Couldn’t just one of those doctors have punched him in the face when they had the chance?

    1. Just because they are in a doctor’s costume doesn’t mean they’re really doctors.

      1. As I recall, they supposedly were actual MDs. There are plenty of commie doctors out there, I’m sure they could find some. The white coats were props supplied by the whitehouse, though.

    2. I was just thinking that. What an asshole.

      1. And when you really want to find out the best way to fund plumbers, why, you collect a bunch of plumbers and ask if they’d like a government-guaranteed subsidy, right?
        That New Yorker mag on TX health care had MDs asking where economists ‘get that stuff?!’
        Uh, from studying the issue, you twit!

    3. What’s the ICD-10 code for “punch to the face by a physician?”

  2. How about an article on the price fixing system for medical procedures set up by the American Medical Association. I’ve only seen that facet of the healthcare system reported on by NPR and as you can imagine they didn’t exactly spit on the notion of central planning.

    1. Free Society|1.26.15 @ 12:13PM|#
      “How about an article on the price fixing system for medical procedures set up by the American Medical Association.”

      As I understand it, the AMA limits the number of people in med schools, but I’ve yet to see any solid evidence.

      1. As I understand it, the AMA limits the number of people in med schools, but I’ve yet to see any solid evidence.

        They convinced the government to shut down “substandard” medical schools and limit the number of new ones. No new medical schools have been allowed to open since the 80s. By limiting the number of medical schools, the number of students is then limited as well.

    2. How about an article on the price fixing system for medical procedures set up by the American Medical Association.

      Price fixing system? What do you mean?

      1. There is a committee within the AMA made up of technocrats, government doctors et cetera. They get together once per year to determine how much Medicaid and Medicare will pay for procedures. In turn, Medicaid and Medicare compensation rates is replicated by insurance carriers for obvious liability reasons.

        Basically instead of markets determining price and compensation, they leave that up to technocrats.

        1. A couple links that mention it. But I’ll try to find that NPR interview that was pretty revealing.



        2. Ah, that price fixing.

        3. They get together once per year to determine how much Medicaid and Medicare will pay for procedures.

          Oh, the RVU committee.

          Yeah, that’s part of Medicare. But its still some steps removed from price fixing. Its more about shifting money from one specialty to another, really.

          Doesn’t really affect Medicaid, most of which is done via a managed care mechanism these days.

    3. I don’t think it is quite price fixing, you do find considerable variation in the price of medical procedures, but the AMA does what they can to limit the supply of MDs and to prevent capable non-MD medical professionals from offering services on their own.
      It is something that has been mentioned by Reason in the past, but not too much lately.

      1. It’s the definition of price fixing.

        1. Or an illustrative example, anyway.

      2. Here’s the one I had in mind, in addition to those other links. It’s this committee’s job to “recommend” compensation rates, recommendations that are accepted over 90% of the time by Medicare and Medicaid. Insurance companies in turn decide what they’ll pay for compensation based on what the government health agencies do, which amounts to an indirect sort of price fixing.


        1. OK, I’d call that price fixing. For some reason I was being silly and thinking that the “sticker price” for medical procedures had something to do with actual prices paid.

        2. It’s this committee’s job to “recommend” compensation rates,

          Not directly. They assign a “score” (called a Relative Value Unit) to procedures, etc.

          How much is actually paid by Medicare for per RVU is where the compensation actually gets “fixed”. And that happens in Congress. Until recently, there was an annual battle over whether pre-programmed reductions in physician reimbursement would take place (the “Doc Fix”). They never did, but that was a Congressional vote on actual reimbursement/compensation.

          It is a very nice example of regulatory capture, cronyist/fascist corporatism, and all that. But its not really price fixing per se.

          1. Agreed regarding regulatory capture – AMA is also the key influencer group related to who is able to provide care, required credentials, regulatory guidance, etc.

            The current system essentially prohibits individuals from selecting (or developing) cost-effective healthcare options.

  3. Good article Mr. Hinkle.

  4. “Proponents of McClellan’s bill say people shouldn’t have to choose between paying for medicine and paying for food. That’s like saying people shouldn’t have to choose between paying for clothes and paying for shelter.”

    Careful, A. Barton – a lot of well-meaning folks believe that second part too! If you make them get off the fence, they might just down where you didn’t want.

  5. In the US ICD10 actually supports north of 140,000 codes

    1. ICD 10 will be very expensive to implement and maintain.

      And it will do zero to improve care or control costs.

      It is a “public health” project, whose only real purpose is to generate data for public health research. Which, you can be sure, will then be used to further restrict liberty.

      1. I know. My current job deals with computer assisted medical coding

  6. What about the ID10T code?

    1. That one only exists between the Keyboard and the chair.

  7. Don’t worry, comrades. Soon we’ll all be able to take a short jaunt down to Cuba to get the world’s best healthcare!

    1. /Michael Moore

  8. US health care is government enforced monopoly from A to Z. This is the major reason that it costs so much.

  9. my buddy’s sister-in-law makes $68 /hour on the computer . She has been laid off for seven months but last month her payment was $21909 just working on the computer for a few hours. pop over to this site……..


  10. “They should have an ICD-10 code for that, too.”

    They do.

    The code is 1D10T

    1. Lol, good one!

  11. Year after year, Reason fails to get the obvious.

    The solution to health care prices is health care freedom. For you to be able to buy from anyone, anywhere, who wants to sell to you.

    The Medical Mafia is simply a shakedown. You can only buy from the government approved racketeers, and only if you get approval from a government deputized gatekeeper. Your money or your life, and don’t you dare try to buy from anyone not approved as part of our Medical Mafia. It’s a deal you can’t refuse.

  12. When playing the bucky balls magnetic construction toys, you have to use not only the space imagination and creativity, but also your logical thinking ability, and even mathematical knowledge, making it possible to exercise both side of the brain.

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