NCPA - National Center for Policy Analysis


September 21, 2006

A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else's money.  When patients pay their own medical bills, they are conservative consumers.  Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab.  Thus, the increase in spending has occurred because third parties -- employers, insurance companies or government -- pay almost all the bills, says Devon M. Herrick, a senior fellow with the National Center for Policy Analysis.

Although polls show that many people fear they will not be able to pay their medical bills from their own resources, the reality is that most people pay for only a small portion of their medical care, says Herrick:

  • For every $1 worth of hospital care consumed, the patient pays only about three cents out of pocket, on the average; 97 cents is paid by a third party.
  • For every $1 worth of physician services consumed, the patient pays less than 10 cents out of pocket, on the average.
  • For the health care system as a whole, every time patients consume $1 in services, they pay only 14 cents out of pocket.

Thus the incentive for patients is to consume hospital services until they are worth only three cents on the dollar, on the average.  The incentive is to consume physicians' services until they are worth only 10 cents on the dollar.  And for the health care system as a whole, patients have an incentive to utilize everything modern medicine offers until the value to them is only 14 cents out of the last dollar spent, says Herrick.

Source: Devon M. Herrick, "Update 2006: Why Are Health Costs Rising?" National Center for Policy Analysis, Brief Analysis No. 572, September 21, 2006.

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