Let's say a patient pays $1000 to a doctor, but half of that sum is fraudulent pricing brought on by patient irrationality, non-transparency, fear of death, and fraud. Sound familiar? The real social cost is what the doctor could have produced, had he not been looking after that patient. The real social cost is $500, not $1000.
This is Uwe Reinhardt's It's the Prices, Stupid story for health care expenditure in America. What Tyler goes on to say is that if this argument is correct, then we should not treat this income transfer to doctors (or other health care providers as real GDP.
But we do have national health accounts that try to correct for health care prices. In Crisis of Abundance, I used this data to suggest that there has been a dramatic rise in the inflation-adjusted use of health care in the U.S. Of course, the use of health care in other countries has risen, also.
The main reason that I believe that prices are not the only explanation for the weak relationship between nominal health spending and health care outcomes is the work of John Wennberg and colleagues at Dartmouth on differences across Medicare regions. He clearly documents differences in the amount of medical procedures performed, with no corresponding differences in outcomes. To me, this is strong evidence that we are wasting medical services, not just over-pricing them.