Supply and Demand

While it would seem that rising administrative costs is a key factor to the rising cost of health care, especially considering the disparity b/w the US and Canada's administrative expenditures as quoted by the NEJOM in 2003, I would imagine that there are other contributors to the soaring costs that we are currently experiencing. Setting caps on what medical offices and imaging facilities can bill for specific procedures may be a solution. Supply and demand, with its associated competition has, historically been a good mediator of incremental costs. The question is, why hasn't this been effective in the healthcare industry?

Other means to lower healthcare costs include the usual suspects: utilizing efficient EMR systems, developing efficient machinery for diagnostic imaging, for example to increase volume of patients, hence lowering costs, consumer education regarding preventative maintenance therapy.

With regards to excessive profits, according to consumer reports, the 6 largest private insurance companies profited by more than 11 billion dollars in 2006 (http://www.consumerreports.org/cro/health-fitness/health-care/health-insurance-9-07/premiums-and-profits/0709_health_profit_1.htm). Quite a large number. Depending on the state, insurers keep 15 to 25% of their premiums collected for administrative costs, marketing, and profits. By this margin, the California mandate capping these costs at 15% is on the low end of the spectrum. Whether or not this is a good thing is a tough call for me. One would imagine, that in the free market, private insurance companies would strive to lower their administrative and marketing costs on their own, driven by the goal to increase profit margins. Thus, it seems strange that gov't legislation would have to step in to control this. Furthermore, I worry that legislation may force private health insurance companies out of the state, thereby decreasing competition in the market which may lead to higher premiums for the consumer.