Health Care Cost Increases – The Question is How Fast?

Rapid advances in health care treatments may help us live longer and healthier lives. For that to come true, we will have to afford the treatments. Today that is a stretch and affordability may diminish as time passes. The cost burden for health care is already astronomical and there are few promising strategies for cost containment. The medical industry is poised to develop a wave of new treatments for gene-related disorders, but despite a jump in efficacy the new wave may increases costs.

CBO estimates that the Affordable Care Act’s exchange subsidies will total $849 billion in the decade 2016 to 2025, and the net cost of health coverage through ACA will be $1.21 trillion over that period. In the same decade, federal Medicaid payments will total $4.63 trillion and net mandatory Medicare expenditures will total $7.3 billion. Those federal health plans will average $1.31 trillion in payments each year. Heaped on top of that are private insurance premiums, deductibles, “not-covered” items, out-of-pocket costs and copays. BEA reports the total health care expenditures for the US were $1.99 trillion in 2014. The Federal government clearly is the dominant payer – using a mix of more debt, payroll taxes, income taxes and fines.

Before the great recession, health care costs grew more than 6% per year, and now they are growing at 5.3%. The health care sector deserves our gratitude for its help, but the cost for its services is high enough to force some working families into painful choices between improvements in health care and improvements in education, housing, and transportation.

Some of the growth in medical cost is attributable to improved tactics in treatment and some to increased volume of patients treated, but 20% to 30% of cost is attributable to wasteful, redundant, or inefficient care. Electronic Health Records may lead to better coordination helping eliminate redundant and inefficient care. And, if we could ever eliminate medical malpractice profiteering that would eradicate “defensive medicine” (medically unnecessary treatments done to protect against roving bands of tort attorneys).

While the increasing costs of health care suggest otherwise, during passage of the ACA, ideas about incentives in payment strategies were floated to reduce the total or “bend the curve” as it is stylishly framed. One idea was that of medical co-ops (Consumer Oriented and Operated Plans). Co-ops were efforts to collectivize health care delivery, like a single-payer system in miniature. Members would pay affordable premiums, get good care and exclude greedy insurers. Unfortunately all but one of the 23 that started at ACA’s inception is now in financial trouble. Gone is the Animal Farm fog of folksy treatment, low premiums and no actuaries or health system administrators. Most now face the tragic injustice of conflict between premiums and the cost of claims. Co-ops are off to a dismal start.

Accountable Care Organizations (ACOs) are another cost-containment idea favored by ACA architects. Last year there were 625 ACOs, generally centered on a hospital. They are structured to be paid for treatment quality and for cost containment, a different model than the usual fee-for-service relationship with payers. The Centers for Medicare and Medicaid Services (CMS) conducts a formal study of each ACO provider’s track record to determine what portion of costs saved will become part of a provider’s compensation.  ACOs are similar to 1990s HMOs but without prior restrictions on the physicians or types of treatment they offer.  ACOs may produce a net cost savings, but so far it is not newsworthy.

Scoring an ACO’s “quality” has to be labor intensive (and labor equals cost). For example, it is unlikely there can be a single justified “payment” for treating a pneumonia case. The effort and risk of adverse outcomes would be presumably different for a 3-year old, versus a middle-aged smoker, versus a middle aged patient with AIDS, versus an 85-year old who also has COPD.

Advanced drugs and technologies may improve cure rates but they come at a higher price. Recently, medical researchers and pharmaceutical firms have developed effective treatments for specific types of cancer and for some genetic-linked disorders. We can expect such breakthroughs to continue as they target some of the 6,000 single gene disorders.  Some of the 6,000 may be ignored because their incidence is too low to justify the $180 million to $1.8 billion that each treatment development costs.

Pricing for new drugs and treatments may actually increase the cost of health care. Consider Sovaldi, a drug that actually cures Hepatitis C. A cure avoids the cost of repetitive treatments and contagion to others so it could reduce total health costs. But, Sovaldi’s price was set at $84,000 when it was a patient’s only choice (but just $900 in India).  Competition forced a 50% price decrease for Sovaldi, but it is still stratospheric.

Better prevention reduces the incidence of diseases and injuries, and it thereby slows cost increases. Diet, exercise and prudent behavior are avenues for consumers to reduce the health care costs they face. Another is to become savvy about medical issues and watch the antics of our elected representatives like a hawk. Laws that govern health care must be foremost about achieving serious cost savings. Don’t tolerate “free stuff” promises from candidates.

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research

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