Several months ago, Forbes, a respected business and economics publication, released an analysis of the “The Most (And Least) Expensive States for Healthcare 2024.” A striking — and concerning — finding was that health care expenses in South Dakota were the second highest in the nation.

The multiplicity of payers and the differing demographics of populations in diverse geographic areas make measuring and comparing total health care costs across different regions a highly complex undertaking. Nonetheless, the findings in the Forbes article have been supported by other research.

An extensive and very interesting paper was published several years ago by the Health Care Pricing Project. This analysis looked at both Medicare costs and private insurance expenditures in 306 health care regions across the U.S. In that study, private insurance expenditures in the Sioux Falls region were the 14th highest in the nation but Medicare expenditures were near the bottom (275th out of 306). The huge difference can be explained by the fact that Medicare prices are set by the Medicare program, whereas each private payer has to negotiate prices with the individual providers.

In eastern South Dakota, there is intense competition between two large health care systems. One could reasonably expect that costs would be lower. The results show that just the opposite is true.

How can this be? The reality is that the economics of health care do not follow the principles that govern prices in standard consumer markets.

For a conventional consumer market to function efficiently, multiple suppliers need to compete based on price and the quality of products available. Consumers need to have full understanding of both product quality as well as  the price charged. They need to be free to switch suppliers if they find a “better deal.” They should have the freedom to “shop around.”

So how does all this apply to health care?

First, and probably most basic, health care providers rarely compete based on price. In fact, unless patients make an effort to ask, the price of a service may well not be known until the bill arrives. Since so much of health care is paid for by third-party payers, patients often have little incentive to ask. Additionally, there is little motivation to “shop” for the best price even if that is an option available to them, which it may not be.  

Furthermore, if patients do have prices to compare from competing providers, they sometimes have skepticism about low-priced services.  They may be concerned that providers have “cut corners” or that the service is less trustworthy. This follows directly from the fact that, unlike most consumer goods, patients usually do not have access to objective information about the quality of the actual service being considered. They usually rely on broad provider reputations or word-of-mouth evaluations. Such sources can provide helpful perspectives but are often lacking in specifics about particular procedures, individual providers, etc.

Treating health care as a commodity has not driven costs lower

Shopping around to get the best deal makes good sense if one is buying groceries or gasoline, but it presents major problems in health care.  Limitations imposed by insurance networks are real. More basically, moving from one provider to another hinders continuity of care and raises the risk of important past history being overlooked or serious risks going unnoticed. Additionally, multiple payers with multiple sets of reimbursement rules have led to administrative complexity and enormous administrative costs.

From the provider perspective, competition all too often leads to duplication of facilities and services. Rather than refer patients/customers to a competitor, each one sets up their own service. This can be a logical action from a business perspective, but in highly technical services such as organ transplantation, small volumes raise the risk of above average cost and poorer outcomes. Competition, instead of promoting lower cost and better service, actually does the opposite.

Paying for health care services is an exceedingly complex undertaking. In the U.S., health care expenditures are the highest in the world, even though we have significant portions of our population who are not getting care. Commitment to conventional market principles has served us well in much of our economy. It is clear, however, that it is not serving us well in the health care.