Costs Too High?

October 13, 2011
|In Policy & Health Reform, Brain Food
|By GHG Advisors

Well, more news and comments out lately about the cost of health insurance, or actually the premium trend being too high.  Additionally, articles on the cost of healthcare and it being too high.  So, let’s give this some quick thought: What’s the difference between “price” and how “cost” is often referred to?  

To me, the price of a product or service is what you have to pay to get it.  For example the price of a gallon of gas two weeks ago in Mendocino CA (there is only one station in this small and charming community on the northern coast) was$5.79 per gallon.   No competition for gas up there so they seem to price accordingly.  In healthcare the “cost of care” is commonly referred to when talking about a population such as “Medicare lives.”  Cost of care for a population is not driven by the price of a unit of service alone, but by the combination of the number or services (utilization rate) and the price per unit produced for that service.  Well, then is the problem the price per unit or the number of units purchased, or a combination of both?

After years ihealthcare, my view is this: the price per unit is rarely the issue anymore, at least where major payment sources such as Medicare and Medicaid have either driven price reduction or prevented any meaningful price increase trend, as they control the payment amount.  Certainly there are exceptions in both of those payment categories and in the private insurer marketplace, but generally the issue is not the price paid per unit of service.  More significantly, the issue is the number of units of service incurred by individuals within these payment categories.

The issues driving this increase in utilization are fourfold:

  • First an increase in need for services due to population aging and population health status;
  • Second the drive of services on the supplier side.  Providers operating  at the margin of necessity of care often provide more services because they are financially encouraged to do so (aka income), and they want to avoid the risk of malpractice litigation for overlooking necessary care;
  • The lack of price sensitivity to the person who receives those services.  Most insured individuals don’t pay out of pocket costs, and most care providers don’t provide pricing information, so even if the individual were to seek competitor pricing information, it is nearly impossible to find the best combination of price and quality.  
  • And finally the improvement of technology, where today we are able to provide services and care unheard of even 10 years ago, with resultant impacts on both lives and healthcare cost.

 So what is the solution to these challenges?   My thoughts on that coming next time.