Where to Draw the Line on Outrageous Health Care Prices – Commentary

Published January 23, 2025

I often write about high prices in health care. Some gene therapy drugs cost more than $1 million for a one-time treatment.

The latest oncology drugs are especially expensive.

Danyelza (for neuroblastoma) and Kimmtrak (uveal melanoma) cost $1.2 million and $1.1 million, respectively. The average annual cost of a new cancer drug is more than $250,000. Nearly half (44 percent) of new cancer drugs are priced at more than $200,000. Numerous cancer drugs cost $70,000 to $120,000 a year.

NCNstats reports the average daily cost of a hospital stay is about $3,000, although it’s not clear what that covers. Joint replacement surgery costs anywhere from $20,000 to more than $50,000, with about $40,000 being the average. An inpatient stay for a hip replacement is one to three days, so obviously, there are a lot of other charges being tacked on to that $3,000 per day.

Debt.org reports the average hospital stay is 4.6 days, at an average cost of $13,262. If surgery is involved, hospital costs soar through the roof. Some of the most common surgeries have price tags that top $100,000.

Charges All Over the Map

Physicians are billing simple tasks, like removing a splinter or freezing off a skin tag, as surgical procedures costing nearly $500.

Recently, Northwestern Memorial Hospital billed a colonoscopy as two procedures: one for inspecting the colon and another for removing two polyps. Because these colonoscopies were billed as separate procedures, the total cost came to $19,000.

Then there are the $50,000 air ambulance charges and unceasing “surprise medical bills.” I described this phenomenon back in March 2019. “Surprise medical bills occur when patients unknowingly receive medical care from physicians and therapists, or in hospitals, clinics, and labs that are not in the provider networks of a patient’s health plan,” I wrote. “Many out-of-network providers purposely refused to join provider networks so they can charge fees many times higher than the usual and customary fees reimbursed by health plans.”

Market Prices Unknown

Charging high prices or refusing to join a network is neither illegal nor immoral. The immoral part is in not informing patients ahead of time so they can decline the service and look elsewhere. Not quoting binding prices ahead of services should make it more difficult to collect for those services if there is a billing dispute.

What is the appropriate price? Nobody knows, and that’s the problem. The appropriate price for medical care is the market-clearing price, where the quantity of services supplied equals the quantity of services demanded. We don’t know what the market-clearing price is, because we don’t have a free market to indicate market-clearing prices.

Then there is the fact that the market-clearing prices will be much lower than the current prices because many people will lack the money to contract for the service of a surgeon, for example. In other words, the market-clearing price for patients with health insurance is different (much higher) than for patients with no health insurance. In a self-pay market, the demand for $1 million therapies is nearly zero, since most patients will not have $1 million to spend.

What About Price Controls?

Controlling the price seems to be the obvious solution. However, this could backfire. If the price ceiling is too low, it will reduce the supply and increase the demand. The result is shortages, rationing, or a degrading of the quality of the goods and services is set below the market-clearing level.

There is no easy way to determine what the true market prices are outside of a market, and there are thousands of medical prices. The process would likely become political rather than based on efficiency.

Some suggest consumers might be better off with a Medicare Prices for All arrangement. Providers claim they lose money participating in Medicare, but there is no evidence backing up that claim. In fact, only 1.1 percent of physicians have formally opted out of Medicare.

Even if marginal Medicare revenue is below the average cost, it is above the marginal cost, or providers would drop out. Except for military hospitals, virtually all hospitals accept Medicare. In fact, about 96 percent of hospitals get at last half of their revenue from Medicare, and 82 percent of hospitals get two-thirds or more of their revenue from the federal program.

While Medicare is a huge payer of medical services, it is not clear that price controls based on Medicare prices would not lead to shortages of services.

Bottom Line

What are the appropriate prices for medical care? Economists do not really know, except that prices should be far lower than they are. The reason for outrageous medical prices is perverse incentives and a lack of competition.

Devon Herrick ([email protected]) is a health care economist and policy advisor to The Heartland Institute. A version of this article appeared on the Goodman Institute Health Blog. Reprinted with permission.