Health Care Price Increases Put An End To Spending Slowdown

There’s been a fair amount of excitement in some circles about a slowdown over the past several years in the pace of aggregate American healthcare spending. That trend now looks to be over as we saw a 4.6 percent increase in overall spending for privately insured patients in 2011.

Delving into the details of the report makes me yearn once again for people to drop the vague and imprecise language around health care costs. That’s because what’s particulalry disturbing here isn’t the increase in aggregate expenditure, it’s what drove the increase—namely high prices. As Sarah Kliff writes, employers have mostly been trying to reduce health care spending “by reducing the volume of care delivered, whether that means higher co-pays for doctor visits or using prevention to catch costly diseases earlier.” That’s sound financial practice for employers, but not necessarily a great outcome for American society. After all, an increase in volume of care delivered could represent progress. If someone invents a pill that cures chronic back pain lots of people will want it and we should make it possible for lots of people to get it.

That’s why the really bad news about 2011 is that spending didn’t go up because we got more health care. Spending went up because we started paying higher prices:

Those efforts, this report suggests, have succeeded: Inpatient admissions to hospitals actually declined by 0.5 percent between 2010 and 2011.

“One thing Americans should realize is they’re actually not heavier users of health care compared to Germans or Canadians,” said Uwe Reinhardt, a health economist at Princeton University. “Utilization in the United States really isn’t that different.”

Fast growth in the price of health care, however, meant that overall spending still increased. The price of the average emergency-room visit rose by 5.4 percent over the same period, hitting $1,381 in 2011.

The cost of professional procedures, such as doctor visits, rose 3.3 percent, while prescription drugs spiked by 17.7 percent.

This all loops back to the health care policy that dare not speak its name in America: price controls. There is a ton of variance in health care policy around the world. Singapore looks very different from Sweden which looks very different from Switzerland, but in all cases the state takes steps to ensure that health care services are affordable in part by literally mandated that low prices be charged. It’s a fair tradeoff for the fact that in all cases consumption of health care services is to one extent or another subsidized by the state. In the US we have the subsidies (through the tax code and the existence of Medicare) but not the price controls, so we pay high prices, so we have high aggregate spending.