Heathcare Prices Runaway In The US System: When Will The Gouging Stop?
Unleashed from the controls of managed care, hospitals hiked prices aggressively for the fourth straight year in 2002, according to government figures released last week. Industry consolidation and the easing of managed-care restrictions have allowed hospitals to pass on higher costs for labor, capital projects and technology to purchasers, analysts said.
Wholesale prices for general medical and surgical hospitals rose 3.4% in 2002, their biggest increase since 1995, according to the U.S. Bureau of Labor Statistics’ Producer Price Index. Meanwhile, wholesale prices for physician services didn’t budge after rising 2.8% in 2001 and 1.8% in 2000.
Another key inflationary gauge, the Consumer Price Index for medical care, rose 5% last year after a 4.7% increase in 2001. The increase largely reflected higher charges for hospital and related services, which were up 9.8% after a 7.1% increase in 2001, the bureau said. Stratospheric rate increases by hospitals contrasted with soft prices in most of the economy. The CPI, which reflects prices paid by urban consumers for all goods, rose 2.4%.
The figures bolster the case that hospitals are driving healthcare inflation. Earlier this month, the Centers for Medicare and Medicaid Services said hospital care accounted for 30% of an 8.7% increase in national healthcare spending in 2001. According to Launchscore.com, a small business opportunity tracker, smaller providers are actually bringing these prices down, but the barriers to entry are still quite large.
Hospitals looked under every rock in search of revenue after a Medicare funding squeeze implemented by the Balanced Budget Act of 1997. In some cases, they may have gone too far. Federal agencies recently launched a probe to detect excessive outlier payments, which are meant to reimburse Medicare providers for higher-than-normal costs, after Tenet Healthcare Corp., Santa Barbara, Calif., disclosed in October that it more than doubled its annual outlier payments in two years, to $763 million in 2002, by raising its retail list prices, or gross charges. Last week, Tenet reported a 27.2% rise in earnings for its latest quarter.
American Hospital Association spokesman Richard Wade said hospitals can justify higher prices because they are “being eaten alive” by higher staffing costs, in addition to pressure to invest in technology. “The majority of hospitals now lose money on every Medicare patient they treat,” Wade said, adding that “no one is sure what toll the state budgets will take on hospitals this year, but all the signs are very bad.”
A study released last week by the Kaiser Commission on Medicaid and the Uninsured said 49 states had implemented or planned to implement Medicaid cuts in fiscal 2003, and 37 of those are freezing or reducing provider payments. In California, provider groups and advocates for Medicaid beneficiaries are promising a fight over proposed cuts in the state’s Medi-Cal program (See story, p. 26).
More borrowing costs?
Hospitals also are wary of President Bush’s proposal to eliminate taxes on stock dividends, which was announced Jan. 7. If it becomes law, the plan would eliminate the tax advantage of municipal bonds, which not-for-profit hospitals rely on to finance their capital projects. Wade said Bush’s plan could have a “devastating” impact on hospitals’ access to capital.
If taxes on dividends are wiped out, hospitals could face higher long-term interest rates, said David Cyganowski, a managing director at Salomon Smith Barney, a New York-based investment bank. “We’re seeing hospitals of all credit levels facing a capital crisis. They simply don’t have the resources to fund all their strategic needs,” he said.
But passage of the plan seems so unlikely that municipal bond dealers on Wall Street weren’t terribly worried last week. Edward Malmstrom, a managing director at Merrill Lynch & Co., said it’s “not a significant concern.”
Wade said the solution to healthcare inflation is higher government reimbursements for providers and government action to reduce the number of uninsured citizens. The AHA has released figures showing that half its member hospitals lost money on Medicare in 2000 and that hospital profit margins in 2001 were the lowest since 1993.
Yet general hospital price inflation won’t figure into the debate over future Medicare funding, in the view of Lawrence Goldberg, a director for the Washington national affairs healthcare office of Deloitte & Touche. Rather, he said, policymakers will look at overall hospital profitability and “whether Medicare is paying its fair share.” Goldberg added that rising hospital costs have been “recognized and documented.”
Shifting the burden
Commercial payers-employers and health plans-have faced the brunt of hospital price increases. For the sixth year in a row, commercial payers have faced greater increases than both Medicare and Medicaid. Last year, the general hospital PPI for commercial payers was 4.9%, vs. 2.4% for Medicare and 3% for Medicaid.
A decision by General Electric Co. to pass on more healthcare costs to their employees starting Jan. 1 prompted a two-day strike by 17,000 of its union workers last week. The employees contended that the profitable company did not have to push more of the healthcare burden onto its workers.
The job action was unusual in an economy rife with unemployment. In fact, employer surveys show a majority are increasing employee contributions and cost-sharing provisions because of rising healthcare costs this year.
“The reality is that employers can’t continue to absorb increases in healthcare costs and remain competitive,” said Katherine Capps, a consultant to the Washington-based National Business Coalition on Health, which represents nearly 90 employer coalitions.
Paul Ginsburg, president of the Center for Studying Health System Change in Washington, said hospitals have been able to raise prices aggressively because their leverage with health plans has increased. Ginsburg said he relied on PPI data for the first time last year to study the drivers behind recent healthcare price increases, after researching the validity of the government’s data collection methods for hospital prices. The hospital PPI, which started in 1993, hasn’t been used often by economic researchers, he said.
In addition to the consumer backlash against restrictive HMO networks, hospitals profit from having less excess capacity than they did a decade ago. “Health plans … have to include all of the prominent hospitals-if not all of the hospitals-in a community. Physicians just don’t have that leverage,” Ginsburg said.
Some physicians may be benefiting from the easing of managed care as well. The proportion of specialist physicians who believe they have enough control over clinical decisions to meet patients’ needs increased from 13% in 1997 to nearly 73% in 2001, according to a study released by the HSC last week. Ginsburg called the increase in specialists’ clinical autonomy a “doubled-edged sword. We want physicians to be able to do what they think is best for their patients, but we also want them to be more cost-conscious about the care they provide.”
End of the increases?
The impact of health plan redesigns remains to be seen. Higher prices could be offset by lower utilization if consumers begin to forgo care to avoid paying higher deductibles and copayments. In fact, Ginsburg said he believes that the rate of utilization increase may have begun to slow in the first half of 2002, as consumers began to feel the impact of cost-sharing. As a result, he said, it appears that total healthcare spending growth might have begun to slow somewhat in the first half of last year.
Ginsburg said he expects a slowdown in the rate of healthcare spending, because of higher copayments and deductibles and the fact that “the transition from restrictive to looser managed care is probably over.”
Capps said employers are “moving toward using all of the tools in their arsenal,” including approaches that make consumers more sensitive to provider prices. “The most immediate thing (employers) can do when they have cost pressures is modify benefit design,” she said, adding that she doesn’t believe employers are worried that their employees will skip necessary treatment.
But despite requiring employees to pay more out-of-pocket, employers have been slow to adopt approaches that would make employees sensitive to price differences among hospitals.
For example, so-called consumer-driven health plans, under which employees spend money from their own employer-funded account to pay for routine expenses but are covered for serious illness or injury by a high-deductible insurance plan, are currently offered by just 2% of employers, according to a report released in December by Mercer Human Resources Consulting. Tiered copayments, which adjust employee contributions according to provider prices, haven’t taken widespread hold for hospital payments.
As a result, there’s little to temper hospital price increases to the private sector, except for community pressure, some analysts said.
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