By Jan & Greg Phillips
Over the last 22 years the price of medical care, including services provided, insurance, drugs, and medical equipment, rose faster than prices in the overall economy. Medical prices grew 110% while prices for all consumer goods and services rose by 71%.
Although there are many reasons for the difference, fundamentally the cause is that the healthcare industry plays by a different set of business rules compared to other industries. Take, for example, price transparency. When you need to take your car in for an oil change, you can look up many different shops, find out in advance what each charges and then make your decision on which shop to go to. Prices usually won’t be greatly different between shops because they want to be competitive with each other. Transparency acts as a “check” to keep prices under control.
Not so in the healthcare industry. Patients are typically unable to get an accurate price for what they will pay after visiting a primary-care doctor or undergoing a medical procedure. Hospitals within miles of each another can have dramatically different charges for identical procedures.
Then there’s the middleman. In the healthcare industry, we rarely pay our providers directly. Our health insurers handle payment. And, they too don’t tell us in advance what our care will cost. Providers and insurers negotiate rates without any public oversight. And those rates vary according to the patient’s coverage. There is a wide range of what a particular procedure costs for an uninsured patient, a patient with Medicaid, Medicare, employer-sponsored or private insurance. There is no standard price for a knee replacement or any other healthcare service.
In an attempt to reign in rising costs, the Affordable Care Act included a provision meant to keep insurance companies’ profits in check. The “Medical Loss Ratio” required insurers to spend 80% of their revenue from premiums on medical care. Unfortunately, while it was intended to keep premiums low, it also removed any incentive health insurers had to negotiate lower provider and hospital prices. In reality, it created a perverse incentive for the industry to increase health costs. Imagine a mom telling her child she can have only 20% percent of a candy bar. A clever child would ask for a jumbo-sized bar. 20% of $10 is $2.00; 20% of $100 is $20. Insurers make more money when healthcare prices increase.
Meanwhile, on the provider side, industry consolidation is wreaking monopolistic havoc. Hospitals are buying up practices and each other, eliminating competition. Private equity firms (PEF) continue to invest heavily in healthcare recognizing the immense profit potential of an industry that lacks price controls, is loosely regulated and has a growing customer base. The PEF are focused on increasing profitability by raising prices, cutting staff and pruning less profitable services like hospital labor and delivery.
Another way the healthcare industry differs from other industries is how much of its revenue comes from taxpayer funds. Federal and state governments account for roughly 50% of the dollars spent annually on healthcare in the US. Lawmakers, presumably influenced by the billions of dollars spent by the healthcare lobbies, control legislation that protects the interests of providers, insurers, pharmaceutical companies and medical equipment manufacturers who are on the receiving end of government contracts.
Our healthcare system is in need of serious reform to become fair and equitable and more like other market-driven industries that prosper even with checks and balances. Whether it’s implementing price transparency, regulating middlemen profitability, breaking up monopolies and implementing campaign finance reform to reduce the influence of the healthcare lobby the resistance to change is likely to be significant. It starts with all of us letting our elected leaders know we demand and deserve better.
Jan and Greg Phillips both have backgrounds in health education and are actively involved in advocating for health care reform.