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Opinion: The Hidden Driver of Healthcare Costs

It is time to bring healthcare's hidden price problem out into the open and debate how it can be resolved.

A new report shows that healthcare prices were the most important driver of spending by employer-sponsored health plans between 2009 and 2010. Health reforms that fail to address prices are unlikely solve our cost problem.

Most people would never consider purchasing a product before knowing its price. But in healthcare, consumers routinely do just that. Part of the reason for this arrangement is the sheer complexity of health services. A typical episode of care involves the purchase of dozens of services and supplies, often from multiple providers.

Moreover, those of us without medical training are in no position to judge the necessity of many health services, let alone whether their prices are reasonable. Even if prices were available, comparison shopping is often out of the question.

Complexity is not the only reason that the prices of healthcare services are not generally available. Negotiated payment rates are considered proprietary. After all, if insurer A could observe that insurer B is getting a better deal, it would demand the same. In well-functioning markets, prices are clear signals to purchasers, and markets respond by driving down variations in prices. Not so in healthcare.

Many have advocated for price transparency in health services (including, for example, the 2008 New Jersey Commission on Rationalizing Health Care Resources). Whether having menus of prices would drive out unwarranted variability and lead to lower costs is an open question. But the culture and reality of price secrecy in healthcare also prevents us from understanding why healthcare costs seem to be so wildly out of control.

The first report of the newly founded Health Care Cost Institute offers a fresh look at the role of pricing as a driver of healthcare costs. HCCI has obtained and analyzed detailed private health insurance records for roughly 20 percent of non-elderly people with employer-sponsored health coverage across the country. Its findings are striking. The institute examined three factors contributing to total spending: the volume of services consumed, the mix of services used, and the price per service. Turns out, it found that this last element, prices, was the leading driver of increased spending.

HCCI found that between 2009 and 2010 spending for this group (including out-of-pocket payments) rose 3.3 percent (4.3 percent in the Northeast). In a time with virtually no general price inflation, this is a substantial leap. Prices drove this growth: they rose 5.1 percent for inpatient stays, 10.1 percent for hospital outpatient visits, and 3 percent per prescription (prices for name brands grew faster than for generics). At the same time, utilization was steady or declined for many services. Accounting for the mix of services did not change the picture -- prices were the major driver.

The national health reform law, the Affordable Care Act (ACA), did not directly take on pricing. Most of its cost-control provisions seek to reduce utilization of low-value services and change the mix of services (i.e., more primary care, less hospitalization). For example, the Medicare Readmission Reduction Program will penalize hospitals when certain patients are re-hospitalized within 30 days of an initial stay. Such policies are likely to lead to better care and, possibly, lower cost. But they are not tackling the price driver. Likewise, the Medicare Shared Savings Program (MSSP) offers incentives to groups of Medicare providers to reduce unwarranted use of expensive care. But the MSSP has also raised the concern that as providers organize into Accountable Care Organizations under the MSSP they will gain more price leverage with payers. Time will tell whether these strategies can bend the cost curve, but they do nothing to bend the price curve.

As healthcare providers will correctly point out, the ACA did, in fact, reduce planned Medicare rate increases with other payment cuts slated to be phased in. Service providers accepted these future price reductions with the understanding that millions of uninsured people will gain private insurance. So, while Medicare and Medicaid payments are trimmed (or at least rates of increase are slowed), the expectation is that private payment will grow. In essence, these policies trim government payments but at the expense of expanding the sector with the poorest price discipline. This is an unsustainable path. As the spread between public program and private payment rates widens, more providers will shun public beneficiaries and access gaps will widen.

Acknowledging that price is a major driver of health spending is only a first step. Finding ways to bring discipline to healthcare pricing is going to be tough. Some will argue that we must first try price transparency, but others will advocate a heavier regulatory approach. Like the ACA, 2006 Massachusetts coverage reform did not directly address cost control. Today, the Massachusetts legislature is debating how far to go to impose global spending limits. Most of the rest of the country is ignoring the problem. Rising healthcare costs threaten the nation’s health insurance regime. The time is ripe to bring the hidden price problem out in the open and debate how it can be addressed.

Joel C. Cantor is the director of the Center for State Health Policy and professor of public policy at Rutgers University. He has authored numerous studies of health insurance regulatory policy, healthcare delivery system performance, and access to care for low-income and minority populations. He serves frequently as an advisor on health policy matters to New Jersey state government. The views expressed in this essay are solely those of the author and are not endorsed by funders of the Center for State Health Policy.

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