How Doctors Influence the Price of Healthcare in the United States and Japan: The Critical Role of Interest Group Politics in America's Healthcare Cost Crisis

The United States spends roughly $3.8 trillion on healthcare each year, or 18% of GDP. Even while delivering less access to health insurance coverage and lower quality of care relative to other advanced economies, America cannot sustain current rates of health spending growth. The biggest line item in the US healthcare budget is inpatient and outpatient care, a large portion of which – and the only spending category that has not yet been thoroughly scrutinized – is payments to physicians for their services. The reasons behind exorbitant spending on doctors’ fees is surprisingly understudied given its fiscal impact. In this thesis, I argue that high US health spending is driven in part by the involvement of doctors, and interest groups representing them, in medical services pricing policy at the federal level.

The United States’ political and healthcare systems are unique among its peer countries. This thesis leverages a comparison between the United States and Japan to contextualize the processes the US government uses to determine health prices and explain the reasons they evolved as they did. All prices for medical services in the US are tied, directly or indirectly, to the Medicare Physician Fee Schedule, a list of services and accompanying prices maintained by the US government and shaped from its inception by medical interest groups. The key arena for these price-setting activities is a committee of doctors, the Relative Value Scale Update Committee (RUC), convened by America’s largest physician interest group, the American Medical Association (AMA). The RUC steers prices by making price change recommendations – almost always increases – to the Centers for Medicare and Medicaid Services (CMS) based on a review process fraught with bias and imprecise science. CMS has historically accepted 87.5% of these changes, making them the basis for how physician services are reimbursed nationally. This annual process is little known, yet it is a key driver of high health spending in the United States.

Investigating the experience of Japan, a fellow advanced postindustrial democracy, yields insights into the relationship between government and doctors’ interest groups in a country that spends less than half as much as the US on healthcare per capital while enjoying high quality outcomes. Like the US, Japan uses both a fee schedule system and a committee comprised of private interests where doctors are heavily represented to assist in the pricing update process. However, Japan’s government retains control. From start to finish, a team of bureaucrats maintains decision authority and relies on both robust national surveys and the input of a government-convened committee of private interests across the health sector to decide on appropriate price changes for physician services.

In the price updating process, Japan has three capabilities the United States lacks which I make recommendations for emulating in the American context: robust and reliable health services utilization and pricing information; transparency, with the public begetting accountability for pricing decisions; and a well-resourced and empowered bureaucracy firmly in charge. With physician services price setting, like in many other realms of American policymaking, self-serving interest group involvement and a disempowered bureaucracy are key challenges that must be overcome in order to fundamentally alter America’s current path toward an unsustainably large – and ever increasing – healthcare bill the country can no longer afford.