It’s the Prices, Stupid—Revisited

Kaiser Health News notes that a new study by the Health Care Cost Institute has produced some interesting findings:

Higher prices charged by hospitals, outpatient centers and other providers drove up health care spending at double the rate of inflation during the economic downturn– even as patients consumed less medical care overall, according to a new study.

Prices rose at least five times faster than overall inflation for emergency room visits, outpatient surgery and facility-based mental health and substance abuse care from 2009 to 2010, says the report by the Health Care Cost Institute, a nonpartisan research group funded by insurers. Prices declined in only one category: nursing home care, which saw a 3.2 percent drop in the cost per admission.

One of the areas with the fastest growing spending, meanwhile, was children’s medical care.

“The story really does seem to be prices,” said Martin Gaynor, chair of the institute’s governing board and a health care economist at Carnegie Mellon University.

Representing one of the broadest looks at actual claim payments made by insurers, the study’s findings raise questions that go to the heart of the nation’s $2.6 trillion annual bill for health care: Why are prices for medical services rising far faster than inflation? Is a rapid increase in spending on children an anomaly, or a long-term trend with major implications for future costs?

“If you don’t know what the cause is, you don’t know what the right policy lever is (for a solution),” Gaynor says

Besides the rapid rise in the cost of children’s medical care there are two things the report made me wonder about. First, since as I have reported previously spending by hospitals and other healthcare providers on capital expenses and supplies is not rising fast enough to be causing the increases that have been observed, what can the cause possibly be?

Second, the finding that spending rose even as utilization declined supports the point the I’ve been making around here for some time and casts at least a little doubt on the notion that the rise in healthcare spending is being driven by patients. The healthcare sector has become a self-licking lollipop. Changing how the bills are paid won’t change that. We need healthcare reform. Healthcare spending is the federal government’s single largest budget item and it’s driving state and local governments to default.

One last point: the situation is actually slightly worse than the article or the study would suggest. They’re comparing the increase in prices in healthcare to the increases in prices, generally. They should be comparing prices in healthcare to non-healthcare prices for a more realistic view of what’s actually happening. Total healthcare spending is now a sufficiently large proportion of total spending that increases in healthcare spending are a major component if not the major component of overall spending increases that they account for a substantial portion of “inflation”, i.e. increasing prices which is apparently what the article intends when it uses the word.