Thursday, May 31, 2012

Health Care Prices Outpace Inflation In A Weak Economy Blogs – Health care costs rose faster than inflation despite weak economy.

U.S. health care expenditure growth slowed in 2010 to about inflation + 2%, down from inflation + 5% over the previous 20 years. That’s good news, which was widely attributed to reduced utilization of health care services by economically-pinched consumers (more).

Chart via

Data recently published by the Health Care Cost Institute (link) drills into this result, and the findings are disturbing. The 3% reduction in health care spending came almost entirely from utilization. For providers it was business-as-usual; they put up prices ~5%, as the chart shows. If utilization had grown in line with U.S. population growth of 1%/year, overall spending would have risen ~6%, 4% faster than inflation, close to the long-term trend.

What does this tell us? In a competitive market, when demand declines, prices drop as providers compete more intensely for the remaining business. U.S. health care providers were able to push up prices 3% faster than inflation despite shrinking demand. Doctors use the term “presumptive diagnosis” when they see a key symptom and immediately know what is the probable underlying disease; then they give it an obscure name. My 40 years of business experience tells me that the presumptive diagnosis here is mercatus necrosis: a dead market.

I’ve argued that market forces can do much to reform U.S. health care. Consumers are starting to do their part, by reducing utilization and buying smarter when they can. Health plan sponsors (employers and unions) are getting into the act, too, and they can do more.

I’m disappointed that health care providers have not taken a stronger role in controlling costs. When I listen to senior doctors, I hear few who have much to say about reducing health care costs, and too many who focus on making money while they can and retiring before the rules change: “après moi le deluge”. The leading hospitals in Boston (and probably elsewhere) likewise fight tenaciously to push their prices up, and the data above speaks to their success. The state is starting to get tough, as reported in the vest-pocket link at left.

On Marketplace this morning I heard Michael Roth, the President of Wesleyan University, discuss his institution’s commitment to limiting tuition increases to inflation + 0% and offering bachelor’s degree in three years, to help students and families bear the cost of a college education (link). Roth believes Wesleyan can trim non-core amenities to realize these savings without compromise to its core mission of preparing students for life. Wesleyan has more than 10 applicants for each place; it is not forced to do this; in fact it could raise it’s fees at inflation + 3% for a long time. President Roth and his trustees believe, however, that this is how they can best achieve their mission as top-tier university. It’s inspiring to hear a powerful institution and its leaders take this stance.

In the end, if the market fails, the government has to act. Rising health care cost is the Plutonium inside the U.S. “Debt Bomb”. U.S. health care is already effectively nationalized: the federal government pays for more than half on-budget or via tax subsidies. Regulation, fines, and even criminalization are tools that are widely used in other parts of the economy to control consumer exploitation and anti-competitive behavior, especially in financial services, where I work. These are ugly alternatives, but effective. Far better if our health care institutions could adopt the Wesleyan approach.

View the original article here

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