Why is the price of a knee replacement for a dog—involving the same technology and the same medical skills that are needed for humans—less than one-sixth the price a typical health insurance company pays for human operations? Why is it less than one-third of what hospitals tell Medicare their cost of doing the procedure is?

When you recover from your knee replacement surgery, let’s say you spend two nights in a hospital room. If you are like some patients, you may be enjoying all the comforts of a luxury hotel. Fido recovers in a cage, which presumably costs much less. But even with meals, two nights in a hotel should come in under $1,000. The price difference we are trying to explain is many times that amount.

Then, there is the difference in surgeons’ skills. Presumably, the surgeons who operate on humans are more talented and therefore more valuable. But an orthopedic surgeon in Dallas typically gets paid an amount equal to about 10 percent of the $32,500 an insurer pays to the hospital.

I suppose you (as a patient) would get more attention than Fido from nurses and support staff for the one or two days of recovery. Guess how much a nurse gets paid in Dallas? It’s about $30 per hour. That is nowhere near the explanation we are searching for.

Let’s take the actual cost hospitals tell Medicare they incur for this procedure. It’s about $15,000, not including surgeon’s fees. But if veterinarians can do it for a third of that amount, it’s hard to see why the human hospital cost isn’t at least half of what it actually is.

The only explanations I can come up with for why human knees cost so much more are (1) government regulations, (2) malpractice liability, and (3) the inefficiencies created by the third-party payment system. It looks like these three factors are doubling the cost of US healthcare.

Let’s take regulations first. In terms of rules, restrictions, and bureaucratic reporting requirements, the healthcare sector is one of the most regulated industries in our economy. Regulatory requirements intrude in a highly visible way on the activities of the hospital medical staff and affect virtually every aspect of medical practice. In Patient Power, Gerry Musgrave and I described the burdens faced by Scripps Memorial Hospital, a medium-sized (250-bed) acute care facility in San Diego, CA. Scripps had to answer to thirty-nine governmental bodies and seven nongovernmental bodies. It periodically filed sixty-five different reports, about one report for every four beds. In most cases, the reports were not simple forms that could be completed by a clerk. Often, they were lengthy and complicated, requiring the daily recording of information by highly trained hospital personnel.

Then there is the malpractice system. Estimates place the burden of the system at between 2 percent and 10 percent of the cost of US healthcare. But it’s hard to separate out the effects of malpractice from the effects of regulation. Remember, both institutions are trying to do the same thing: reduce the incidence of adverse medical events (no matter how imperfectly). If a hospital fails to follow a regulation and that failure leads to a patient death, the failure would undoubtedly be the basis for a malpractice lawsuit. So the existence of the malpractice system helps encourage compliance with regulations—making them more costly.

Finally, there are the inefficiencies produced by the third-party payment system. When providers do not compete for patients based on price, they typically do not compete on quality either. In the hospital sector, they tend to compete on amenities instead. The way you compete on amenities is to spend more on amenities. This adds to costs.

It’s amazing how often people cannot see the forest for the trees. Think how many volumes have been written trying (and failing) to explain why our healthcare costs are so high. Sometimes the answers to complex questions are more easily found by asking the simplest of questions. I will ask and answer more of such questions in my next blog post. Until then, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

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