Addressing The Systemic Problems Of Rising Health Care Costs In America – Pacific Research Institute

Addressing The Systemic Problems Of Rising Health Care Costs In America

Even with the 2016 Presidential campaign mercifully coming to an end, there is more drama to come. While there will be many epicenters, perhaps none will impact the daily lives of more citizens than the impending drama in the health care industry.

While not referring to the Affordable Care Act, Herbert Stein’s truism, “If something cannot go on for ever, it will stop”, is apropos. The combination of double digit increases in premiums (they will rise 22 percent on average for the benchmark silver plan in 2017), and declining insurer participation in the marketplaces, cannot go on for ever. The next Congress and Administration will, consequently, have to do something.

The need to do something should not encourage policymakers to do anything. Effectively addressing the problems of rising prices and declining quality requires an accurate assessment of their causes, not a focus on a convenient fall guy.

The typical fall guy is the pharmaceutical industry. Anecdotes of double digit list price increases dominate the headlines creating the appearance that health care inflation is synonymous with rising drug prices. This is not the case.

As with many industries, list prices do not reflect the actual prices paid for pharmaceuticals. Take a hotel room for example. Most guests do not pay the hotel’s list price, but instead take advantage of deals, discounts, or travel programs in order to procure a better price. The same is true for pharmaceuticals.

States, health insurance companies, and pharmacy benefit managers all receive manufacturer rebates and bulk purchasing discounts. They also employ price management tools such as preferred drug lists and prior authorization requirements. Due to these rebates and programs, the list prices that attract the headlines are not reflective of the actual prices paid for pharmaceuticals – the actual prices paid are significantly less.

Further, there is no evidence that pharmaceutical expenditures are driving overall health care inflation. One indication that pharmaceutical price increases could be driving health care inflation would be pharmaceutical spending comprising a rising share of total health care expenditures. But, this has not been the case.

In reports published in 2015 and 2016, the Progressive Policy Institute found that rising labor costs accounted for the majority of the increases in personal health care spending. In the 2016 report, the authors found that “47 percent of the total increase in personal health care spending” during 2015 was due to rising labor costs. Increased expenditures on prescription drugs, on the other hand, only accounted for 18 percent of the increase in personal health care spending. Further, the 2016 study found that through the first half of 2016, expenditures on prescription drugs were growing at less than half the rate of 2015.

Of course, there is an important caveat. Even if pharmaceutical spending were rising as a share of total health care spending, but that rise was due to pharmaceutical investments driving down expenditures in other health care areas (e.g. a reduced need for more expensive surgeries), then it would still be inaccurate to argue that pharmaceutical spending is driving overall health care inflation.

Similarly, simply because labor costs are driving personal health care spending higher does not necessarily indicate that there is a problem. If people were spending more on doctors, nurses, and other health practitioners, but were also seeing greater health care value, then these expenditures would not necessarily be bad. The problem arises because higher labor costs are not associated with improved outcomes.

These caveats illustrate the futility in trying to fix the health care inflation problem by focusing on one component of the health care system. Health care inflation is a systemic problem caused by a confluence of policy mistakes that stifle efficiency and exerts constant upward pressure on prices.

The root cause of many of the health care system’s problems are the rules and restrictions created by the current third-party payer system that drive a wedge between doctors and patients. Therefore, effective reforms will empower patients and families by: increasing choice; creating a more competitive insurance market across state lines; expanding tax-advantaged Health Savings Accounts; and expanding provider competition.

Just as with any market, empowering consumers and enabling greater competition ensures that the health care system becomes more responsive to patients’ needs, creates transparency in pricing, and helps control overall health care costs.

Unlike proposals that follow the latest headlines, effective reforms address the structural defects that plague the current health care system. While less dramatic, such reforms are the best way to enable a vibrant and affordable health care industry.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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