Higher Prices for Medical Services
Medical inflation continues to be a chief factor driving premium increases. According to the 2009 National Health Expenditures report issued in January 2011, price increases accounted for nearly two-thirds of the increase in health care spending. Additionally, the report notes “Growth in non-price factors fell noticeably during the recession, mostly because people reduced their consumption of health services.” In order to bring the cost of coverage down, policymakers must embrace workable solutions to reduce the rate of medical inflation.
Demand for Newer Technologies
One of our nation’s strengths lies in our ability to bring forth innovation across all sectors, including health care. Our system of private-public health care financing enables the U.S. to lead the world in developing medical technologies. Spurred on by multi-million dollar advertising campaigns, consumers understandably demand access to the newest medical devices, procedures and drugs – regardless of their incremental value. However, newer is not always better. The “latest and greatest” treatments are almost always far more expensive than existing technologies but sometimes fail to offer a corresponding benefit to patients. Even more troubling are instances in which data have been misrepresented in order to speed up regulatory approval for certain devices or drugs, which has resulted in documented patient harm. Access to new technologies is critically important, but patients have a right to know whether newer, costlier treatments work at least as well as proven treatments that are more affordable.
Provider Consolidation
In too many markets, providers are banding together to demand – and receive – higher reimbursement rates from health plans. Much of this demand for higher reimbursements from private plans stems from Medicare and Medicaid underpayments to providers. Whatever the cause, higher provider reimbursements means increased premiums for working families and businesses. However, increased provider reimbursements do not lead to a corresponding increase in patient outcomes. A report by the Massachusetts Attorney General identifies “the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs,” and “found no evidence that the higher pay was a reward for better quality work or for treating sicker patients.” In a report in Health Affairs, Paul Ginsburg and Robert Berenson note that “providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned.”
Cost Shifting from Public Programs to Those with Private Coverage
Cost shifting occurs when hospitals and physicians are reimbursed for services at rates that fail to cover the costs of care. Underpayments by Medicare and Medicaid force these shortfalls to be shifted to individuals, working families, and small businesses with private coverage. According to a December 2008 Milliman study, an average family of four already pays a hidden tax of more than $1,700 annually on their premiums because Medicare and Medicaid significantly underpay hospitals and physicians, compared to their actual costs of delivering medical care. To offset these inadequate payments, providers pass on higher costs to individuals, families and employers in the private sector. Additional cost-shifting results from uncompensated care provided to the uninsured. According to a May 2009 Families USA study, the cost-shift associated with uncompensated care adds more than $1,000 annually to family premiums.
Medical Liability
For the health care system as a whole, the direct costs of medical liability were estimated to total $29.4 billion in 2005 according to a Towers Perrin-Tillinghast report. These direct costs represent a small fraction of the hundreds of billions of dollars annually spent on wasteful and redundant care. These implicit and explicit costs in turn drive health insurance premiums higher. Another analysis of the composition of health insurance premiums concluded that a full ten cents of every premium dollar is spent on medical liability and defensive medicine.
Regulations, Mandated Benefits & Taxes
State regulations, benefit mandates, and taxes also increase the cost of coverage. As states expand the number of regulations and benefit mandates, compliance and benefit costs add to the price of premiums. Additionally, health plans are subject to certain state taxes which further increase the cost of premiums. The new $70 billion premium tax that is part of the ACA will significantly add to the tax burden of providing health coverage -- and consumers and employers will pay more.
Administrative Costs & Profits
Health plans’ administrative costs and profits are sometimes cited as a reason why premiums are rising. The evidence clearly contradicts this unfounded claim. Health plan profits in 2010 accounted for less than one penny out of every dollar spent on health care. Further, government data show that the percentage of total premiums devoted to health plans’ administrative costs and profits has declined for six consecutive years.