In a March 9th ABC News piece titled “Why Health Care Costs Keep Rising: What You Need to Know,” Huma Khan identifies five “drivers of cost increases” including: medical technology; administrative costs; disease and aging; medical malpractice; and prescription drugs. This is a decent list; technology and an aging population are definitely big contributors to rising health care costs.

But as Jason Fodeman and Robert Book detail, none of the factors mentioned above are the true driver health care costs:

To a large extent, increased health care spending is a consequence of this third-party payment system. In recent decades, the percentage of health care spending paid “out of pocket” by patients has fallen substantially, from 52 percent in 1965 to only 15 percent in 2005, which means that third-party payments have increased from 48 percent to 85 percent. As third-party payer spending has risen as a percentage, total spending has grown even faster. Since 1965, real per capita health care expenditures have increased approximately sixfold.

In short, neither the patient, the doctor, the insurance company, nor any government program has much incentive to spend health care dollars efficiently. A system that determines prices through administrative procedures rather than market processes disconnects the prices paid for health care services and products from both the costs incurred to provide them and their value to patients. A tax code that rewards employees who purchase insurance through their jobs and punishes individuals who purchase health insurance in the outside market further distorts these incentives. A litigious tort system that encourages doctors to order unnecessary tests and procedures at no cost to themselves in order to forestall lawsuits exacerbates the problem. However, the main problem is a system that insulates both patients and producers from normal market incentives to reduce prices and spending.