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BlogRX - Taking the Pulse of the Healthcare Industry

It’s the Prices, Stupid

In a 2003 Health Affairs article, Uwe Reinhardt and colleagues argued that the chief explanation of why U.S. healthcare costs are so high is not because of utilization, but because of uncontrolled growth in the cost per unit of care.  An examination of current data indicates that that is even more the case today. 

 Since 2010 the Health Care Cost Institute (HCCI) has published annual reports on the health care spending of individuals under 65 covered by employer sponsored insurance (ESI).  The data includes commercial claims from four of the nation’s largest insurers covering more than 50 million individuals per year.  Whereas Medicare is dominated by a single monosopnistic price-setter (the government), commercial claims represent a much larger market where independent buyers and sellers determine the terms of exchange.  An examination of this latter market reveals that the growing market power of sellers relative to payers has allowed them to steadily increase prices well above what they would be able to receive in competitive markets. 

 Healthcare cost growth is a result of changes in the number of services (utilization) and the prices paid for those services.  Because the prices paid can be affected by changes in how care is delivered, the HCCI data also adjust for changes in service intensity, a measure of the complexity and resources required by a particular service.  Many factors can account for changes in the intensity of a service over time, including new forms of treatment, growing technological complexity and population health status.  The ability to adjust for changes in service intensity allows HCCI to calculate an intensity-adjusted price per service, thus making the reported cost of a given service comparable over time.

 The table below shows the change in per capita utilization and intensity-adjusted price per service for acute inpatient, outpatient (emergency rooms, observation and outpatient surgery) and professional services (office visits) spending over the three year period 2010-13.  These three categories accounted for 83 percent of total per capita healthcare spending by ESI covered individuals over the period. 

 Total Change in Per Capita Utilization and Intensity-Adjusted Price
                    per Service, by Service Category, 2010-2013

                                               Utilization     Price per Service

Acute Inpatient                       -7.13 %            22.15 %
Outpatient                                 0.90%           20.78 %
Professional Services              3.95 %             5.38 %

 Over this same period, the consumer price index increased a total of 6.83 %. 

 The data is highly instructive.  While utilization of acute inpatient and outpatient services was flat to down over the period, their respective intensity-adjusted price per service rose more than three times the growth in the CPI.  Both the utilization and cost of professional services, on the other hand, grew significantly less than the CPI. 

 This result is entirely consistent with the increasing trend of hospital and health system consolidation in recent years.  In its 2014 Hospital Acquisition Report, Irving Levin Associates reported that between 2009 and 2013 hospital deal volume increased 14 % annually, while at the same time deal size steadily increased.  

 The hospital industry is clearly using its growing market power to extract supply side rents from payers, defined as the excess of prices they would be able to command above those they could obtain in a competitive market.  The relatively fragmented market for physician services, on the other hand, has held prices commanded by doctors in check.

 A number of industry trends suggest that this hospital industry consolidation is likely to continue.  As long as it does, rising healthcare prices are likely to follow.

John McCracken, PhD