Medical Mystery: Something Happened to U.S. Health Spending After 1980

Although American health care markets are highly consolidated, which contributes to higher prices, there are also enough players to impose administrative drag. Rising administrative costs — like billing as well as cost negotiations across many insures — may also explain part of the problem.

The additional costs associated with many insurers, each requiring different billing documentation, adds inefficiency, according to the Harvard health economist David Cutler. According to a recent study, the United States has higher health care administrative costs than different wealthy countries.

“We have big pharma vs. big insurance vs. big hospital networks, as well as the patient as well as employers as well as also the government end up paying the bills,” said Janet Currie, a Princeton health economist. Though we have some large public health care programs, they are not able to keep a lid on prices. Medicare, for example, will be forbidden to negotiate as a whole for drug prices, as Ms. Currie pointed out.

nevertheless none of that will explains the timing of the spending divergence. Why did that will start around 1980?

President Carter wearing a cardigan sweater in 1977 to encourage setting thermostats lower to limit the country’s dependence on foreign oil. Oil cost shocks strained many countries’ ability to afford health care.CreditAssociated Press

Mr. Starr suggests that will the high inflation of the late 1970s contributed to growth in health care spending, which different countries had more systems in place to control. Likewise, Mr. Cutler points to related economic events before 1980 as contributing factors. The oil cost shocks of the 1970s hurt economic growth, straining countries’ ability to afford health care. “Thus, all across the planet, one sees constraints on payment, technology, etc., inside the 1970s as well as 1980s,” he said. The United States will be not different in kind, only degree; our constraints were weaker.

Later on, once those spending constraints eased, “suppliers of medical inputs marketed very costly technological innovations with gusto,” Mr. Aaron said. They “found ready customers in hospitals, medical practices as well as different entities eager to keep up with rivals inside the medical arms race.”

The last third of the 20th century or so was a fertile time for expensive health care innovation. Sherry Glied, an economist as well as a dean at fresh York University, offered a few examples: “Coronary artery bypass grafting took off inside the mid-to late 1970s. Later, we saw innovations like drug treatments for H.I.V. as well as premature babies.”