Abstract
Higher prices are increasingly recognized as a significant cause of the outlier status of the United States in health care expenditures. At the same time, various explanations are often invoked to justify higher prices as rational or even defensible. We evaluate—and mostly counter—potential explanations of why health care prices are higher in the United States: upper-tail income inequality explains higher physician incomes; physicians need to recoup higher training costs; American patients are perceived to have different preferences, while providers face higher medical malpractice and administrative costs; health care purchasing occurs in a fragmented marketplace; and rent seeking rewards providers with favorable prices at the expense of consumers. Of these explanations, rent seeking is compelling partly because it is more consistent than other explanations in explaining higher prices across all sectors of the health care system. We also discuss why administrative costs are gaining recognition as an important factor; however, the understanding of their contribution and the knowledge of solutions is evolving, rather than fully developed. Policy solutions to address rent seeking are challenging, because they threaten provider income. Most solutions, such as price transparency, are often touted as a magic bullet, but these are likely to be effective only in combination with other solutions.
