Why is Medical Care Expensive in the U.S.?

Abstract

One impetus for reform of the health care system in the United States is that in the U.S. more is spent on medical care than in other countries, with no noticeable difference in results. It is commonly thought that this is a result of a defect in the organization of medicine in the U.S. which can be repaired by “reform.” However, medicine is a labor intensive good and labor is more expensive in the U.S. We show that in a simple general equilibrium model these conditions will invariably lead to a higher price and a higher percentage of GDP spent on the labor intensive good. While reforms may improve the functioning of the health care sector, they are unlikely to have a major effect on spending levels (unless they artificially reduce usage of medical care).