Why South Dakota health care is the nation’s second most expensive • South Dakota Searchlight

A few months ago, Forbes, a respected business and economics publication,States with the most (and cheapest) healthcare costs in 2024A surprising and disturbing finding is that South Dakota had the second highest health care costs in the nation.

The diversity of payers and demographic differences in various geographic regions make measuring and comparing total healthcare costs across different regions a very complex task. That said, the findings in the Forbes article are supported by other studies.

A few years ago a very extensive and interesting paper was published. Healthcare Pricing ProjectThe analysis looked at both Medicare and private insurance spending in 306 health care regions across the U.S. The study found that the Sioux Falls region’s private insurance spending was 14th highest in the country, but its Medicare spending was near the bottom (275th out of 306). This large difference can be explained by the fact that Medicare prices are set by the Medicare program, while each private insurance payer must negotiate prices with individual providers.

In eastern South Dakota, where there is fierce competition between two large health systems, one would naturally expect costs to be lower, but results show the opposite.

Why is this the case? The reality is that health economics does not follow standard consumer market pricing principles.

For traditional consumer markets to function efficiently, multiple suppliers must compete based on price and the quality of the products available. Consumers must have a full understanding of both the quality of the product and the price they are being charged. Consumers must be free to switch suppliers if they find a “better deal.” Consumers should have the freedom to “shop around.”

So how does all this apply to healthcare?

First, and perhaps most fundamental, health care providers rarely compete on the basis of price. In fact, unless patients make an effort to inquire, they may not know the price of a service until the bill arrives. Because the vast majority of health care costs are paid by third-party payers, patients have little incentive to inquire. Moreover, they have little incentive to “shop” for the best price. Even if the best price were an option, it may not be an option at all.

Additionally, when patients are able to compare prices across competing providers, they may be skeptical of lower-priced services. They may have concerns that the provider is “cutting corners” or that the service is unreliable. This is a direct result of the fact that, unlike most consumer goods, patients typically do not have access to objective information about the quality of the actual service they are considering. Patients typically rely on broad reputations and word-of-mouth ratings of providers. While such sources offer a helpful perspective, they often lack details about specific procedures, individual providers, etc.

Treating healthcare as a commodity hasn’t lowered costs

When buying groceries or gas, it makes sense to shop around to get the best deal. But in healthcare, it creates big problems. Restrictions imposed by insurance networks are real. More fundamentally, moving from one provider to another disrupts continuity of care and increases the risk that important past history will be overlooked or serious risks will go unnoticed. Plus, multiple payers with multiple reimbursement rules add administrative complexity and exorbitant administrative costs.

From the provider’s perspective, competition too often leads to duplication of facilities and services. Rather than referring patients and customers to competitors, each company launches its own service. This is a logical move from a business perspective, but for highly skilled services such as organ transplantation, low throughput increases the risk of above-average costs and poor outcomes. Rather than promoting cost reductions and better services, competition actually has the opposite effect.

Paying for health care is an incredibly complex undertaking. The United States has the highest health care costs in the world, even though a significant proportion of its population does not have access to health care. Traditional adherence to market forces has worked well in many parts of the economy, but it is clearly not working well in health care.