The discussion so far on cost disease seems pretty inadequate, and I think a key piece that's missing is the concept of Hollywood Accounting. Hollywood Accounting is what happens when you have something that's extremely profitable, but which has an incentive to not be profitable on paper. The traditional example, which inspired the name, is when a movie studio signs a contract with an actor to share a percentage of profits; in that case, the studio will create subsidiaries, pay all the profits to the subsidiaries, and then declare that the studio itself (which signed the profit-sharing agreement) has no profits to give.
In the public contracting sector, you have firms signing cost-plus contracts, which are similar; the contract requires that profits don't exceed a threshold, so they get converted into payments to de-facto-but-not-de-jure subsidiaries, favors, and other concealed forms. Sometimes this involves large dead-weight losses, but the losses are not the point, and are not the cause of the high price.
In medicine, there are occasionally articles which try to figure out where all the money is going in the US medical system; they tend to look at one piece, conclude that that piece isn't very profitable so it can't be responsible, and move on. I suspect this is what's going on with the cost of clinical trials, for example; they aren't any more expensive than they used to be, they just get allocated a share of the profits from R&D ventures that're highly profitable overall.
Ah, that makes sense. Thanks for explaining.
This post is a container for my short-form writing. See this post for meta-level discussion about shortform as an upcoming site feature.