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A Voice for Private Physicians Since 1943

Third-Party Payment Key to Medical Cost Increases, Economists Write

The rapid increase in medical costs starting in the 1970s is commonly ascribed be market imperfections. However, federal and state governments have long suppressed the functioning of the market system in the medical industry, write Maureen Buff and Timothy Terrell, Ph.D. in the fall issue of the Journal of American Physicians and Surgeons.

“Third-party payment, with its moral hazard, has increased demand and thereby driven up prices,” they write, pointing out that prices have increased much less for items with low levels of third-party payment.

“Government payers have an even worse cost-containment record than privately provided medical care.” Since 1970, “the costs of Medicaid have risen 35 percent more, and the costs of Medicare have risen 34 percent more, per patient, than the combined costs of all health care in America apart from these two flagship government-run programs.”

More spending on prevention will not necessarily lower costs, they state. “The most effective preventive measures may include changes to one’s lifestyle or diet, occupational and educational decisions, and other choices far outside the realm of medical intervention.”

Many features of the Patient Protection and Affordable Care Act (PPACA or “ObamaCare”) will aggravate the problem of moral hazard and thus tend to push prices higher. On the other hand, PPACA, by pushing Americans toward higher-deductible insurance plans, could mitigate some of the moral hazard.

“The expansion of higher-deductible insurance did not receive much attention initially, but could be one of PPACA’s more important effects.” they observe.

PPACA’s increases in deductibles and copayments have not, however, been accompanied by premium decreases. Instead, the average family premium for employer-sponsored coverage has risen by $3,671.

“On the whole, legislation is pushing medical care in the wrong direction,” the authors conclude. “It attempts to use regulation, rather than freer markets, to resolve the problems caused by earlier regulation. The only way to reduce prices while increasing quality and accessibility is to take a free-market approach.”

The Journal is the official, peer-reviewed publication of the Association of American Physicians and Surgeons (AAPS), a national organization representing physicians in all specialties, founded in 1943 to preserve private medicine and the patient-physician relationship.

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