Ezra Klein notices that American pay more per unit of health care than other countries, but completely fails to understand why.

In other countries, governments set the rates that will be paid for different treatments and drugs, even when private insurers are doing the actual purchasing. In our country, the government doesn't set those rates for private insurers, which is why the prices paid by Medicare, as you'll see on some of these graphs, are much lower than those paid by private insurers. You'll also notice that the bit showing American prices is separated into blue and yellow: That shows the spread between the average price (the top of the blue) and the 90th percentile (the top of the yellow). Other countries don't have nearly that much variation, again because their pricing is standard.

Other governments set prices that are artificially low, often barely above the marginal cost for drug and equipment manufacturers. These prices are just barely high enough that it's worth selling products in these countries given that the products have already been developed, but the margins aren't high enough to actually finance the research and development that goes into creating the drugs and equipment. These R&D costs are carried by American consumers, which is why our costs are higher.

The problem, however, isn't that our costs are too high -- the problem is that foreign countries are free-riding on the American consumer and thereby paying too little. If the American government attempts to set our prices as low as those of other countries, the health care industry that cares for the world will wither and die. Instead, we should be looking for ways to force foreign countries to pay more reasonable prices.

One possible approach is to pass a law prohibiting the sale of any specific drug or equipment in America at a price more than X% higher than that paid by an average of the next 10 highest price countries. Such a rule would force the health care industry to either push for higher prices in foreign countries or stop sales there entirely, instead of settling for prices barely above their marginal cost.

Anyway, the point isn't that the health care industry is ripping off Americans, but that foreign countries are free-riding off our mostly free market.

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