Health care has priced itself out of its own market

November 18, 2013
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It’s no secret the U.S. economy slowed in the 2000s after the go-go decade preceding it.

But the health care system—hospitals, doctors, drug companies, device makers and health insurers—apparently didn’t get that memo.

The industry, overall, just kept raising prices—far faster than the pace at which demand for their products and services, or even the aging of the population, called for. In fact, nine out of every 10 additional dollars spent on health care in 2011 compared with 2000 were due solely to price increases.

That’s the finding of a study published last week in the Journal of the American Medical Association.

Now, health care is both heavily regulated and heavily subsidized by governments, particularly the federal government. And those regulations and subsidies make the health care “market”—which the new study describes as a misnomer—work differently than the rest of the economy. So from that perspective, it shouldn’t surprise us to see health care follow a different arc.

Still, the soaring of prices unrelated to supply (which has, on the whole, increased) or demand (which rose less than 2 percent per year on average from 2004 to 2011), shows the health care industry at large is simply detached from its customers’ real ability to pay.

“The continued increase of health care as a portion of the economy can largely be accounted to the failure of the rest of the economy to increase much at all,” wrote Dr. Hamilton Moses, the lead author of the JAMA study. Moses works at the Virginia-based Alerion Institute and the Johns Hopkins School of Medicine.

The steady price increases occurred across the board in the health care industry, Moses and his fellow researchers found. Even after adjusting for inflation that occurred economy-wide, they found that:

- Hospitals’ prices rose 4.2 percent per year, on average, from 2000 to 2011.

- Drug and device companies, which include Eli Lilly and Co., Roche Diagnostics Corp. and Cook Medical Inc., hiked prices an average of 4 percent per year in the same period.

- For doctors and other clinicians, prices rose 3.6 percent per year on average.

- Administrative services, which includes private health insurers such as WellPoint Inc., as well as government and some provider-level administration, rose 5.6 percent per year, on average.

Many of these industries are now retrenching. Lilly has laid off more than 5,500 people in the past four years, and its pharmaceutical brethren have made similar cuts.

Indiana’s three largest hospital systems have announced the elimination of roughly 900 positions this year, and smaller hospitals have quietly made similar cuts.

This study shows those painful cuts had to come, at least in part, because these health care companies failed to realize sooner that they had overshot their markets.

It's no wonder, then, that 75 percent of Americans think the U.S. health care systems needs fundamental reform, or else needs to be entirely rebuilt.

    Is it any wonder there is a consistent increase in pricing in healthcare. When our fearful leader proposed an (initial 10% additional tax on health care manufacturing the knee jerk reaction was "we need to cover this new corporate shortfall". while the tax levy was adjusted the fact is the oversight that has been enforced in the medical manufacturing sector has risen two fold in the past 6 years, effectively another tax. When is enough enough? jobs will continue to be lost at the simple and obvious slow destruction of a very good level of healthcare. It appears we are willing to bring the care to a screeching halt for the few relatively few without coverage instead of creating a plan that gives the coverage by creating jobs that provide care. instead we allow this administration to believe there is only one solution....stop industry growth through taxation and still deliver a poor level of care, and let the very industry that allows for high paying high, benefit jobs pay the tab. Don't kid yourselves we will pay the price eventually for shortchanging the makers and providers with our health care for the truly sick. I hope we wake up soon before we find the entire system in the morgue.
    • Health Cost
      I'm suppose to feel sorry? I do for the people who lost their jobs due to no fault of their own. Wondering of the very people who laughed as they increased cost are still employed. Probably and now spinning the fact so they can justify the layoffs. Greed.
      • You sound like a gambler
        Gamble if you will with the healthcare system. I for one would prefer not to. today you can still get care. who are you going to when your sick and there is no one to see you for your issue. I simply will not gamble that the system will continue to work if taxed to oblivion. The foundation is based on capitalism, like it or no.t To make crazy changes in a whim will send shock waves we my never recover from. I pray for your health Reddog!
      • @Mike
        You sound like one of the very lucky ones who has enjoyed rich benefits from your employer. And it also sounds like you are employed in mfg of healthcare devices. Do you believe that unfair pricing with no transparency is a good thing? That is what we have in our health care system. And there is so much waste. Pricing has been increasing with no justification. I told my colleagues more than 10 years ago that we would see healthcare price itself out of the market and employees lose jobs. I worked in the financial area of a hospital and witnessed the spiraling increases in prices with no reason or need for it. They did it because they could and no one stopped them. Obviously, you are not happy that things are changing rapidly. I say they are not changing rapidly enough. Our system is broken and needs a major overhaul. We need to put an end to employer sponsored health insurance, end Medicare Advantage policies, demand pricing transparency from device mfrs, and so much more.
      • Soaring prices?
        JK, as you reported, the linked study reveals that hospital "prices" (not payer rates) increased 4.2% per year. But with nearly all major payer contracts limiting annual rate increases to inflation, one cannot reasonably conclude that hospitals enjoyed per unit increases of 4.2% per year. Similarly, few physicians have any ability to negotiate price with payers. Virtually all payers offer standard fee schedules on a take-it-or-leave-it basis. So for physicians it is even less likely that 3.6% annual price increases had any impact on per unit revenues. Only the relatively few self-pay patients who can afford to pay their hosital or physician bills will have experienced the annual price increases reported.
        • To CJ
          It would be nice for hospitals if you were right, but unfortunately you are not. The study did not use hospital charge data. It used personal health care expenditure data from CMS, which is based on actual payer prices, and then estimated medical price inflation using data from the Department of Labor's producer and consumer price indexes. That estimate could be off, but we are talking about real prices, not the fictional charge data. So, assuming the estimate is accurate, consumers (and their employers and insurers), did indeed see hospital prices rise 4.2 percent faster than inflation every year in the 2000s.
        • college
          no different than obama touting his education reform and giving all students the opportunity to attend college. with his gov handouts and rock bottom interest rates, all we've seen is college tuition skyrocket. everything obama touches blows up in his face. when will low info left realize there's a huge gap in what obama promises and the reality of his policies.
        • @carla
          Actually you are are actually incorrect on both accts. It appears it is you were the one benefiting form the high costs of our care. You had or had a job in the system while your colleagues who actually deliver the care are being trimmed by the system. nursing is slashed, physicians are getting trimmed and as a result the care is and will continue to suffer. I think you missed my point. Costs are nuts but the answer is not to continue to tax the living hell out of the process. Let CMS do their job by creating legit reimbursement for what care is given. If it appears that I am an Obamma hater than appearances are quite clear. He has effectively taken a system out of control and managed to create havoc, mistrust and has delivered another blow to our economic process. Random taxing is not the answer in any case ever documented. It has no bearing on cost control, in fact it has the opposite effect. The providers and manufacturers of care will either get it back on list prices or they will roll up the carpet which frankly stifle innovation, advancement and ultimately your care.
        • Who do they think they are fooling?
          I recently visited an emergency room with a pain in my side. I was there two hours, left with a perscription for antibiotics for Diverticulitis and advice to check with my regular doctor in a week. TWO HOURS - bill was over $5,600. Why ? because I had health insurance and other do not. We need univeral health care. Period. The End. Wake UP.
          • Billed Amt does not equal Paid Amt
            The amount that a provider (hospital, doctor, etc) charges will not be the "allowed amount" that your insurance company will pay, or apply to your deductible. Since those payments are negotiated, often the provider does not even know what amount will be paid for each service. The provider will "write off" the difference. You will be amazed how much less the actual allowed amount is than the $5600 billed, and no one pays that difference.
          • "relatively few"
            Since when is 15% of the population a "relatively few" people without coverage? If it were 1.5% then, yes, that would be relatively few, but 15%. If 15% of the population were unemployed, would you call this "relatively few"?

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