Hospital prices have risen much faster than the consumer price index (CPI) for other goods and services. This has led to unsustainable losses for health insurance companies, requiring them to increase premiums.
Patients and employers are often unaware of these hidden costs when they make coverage choices during open enrollment. This lack of transparency encourages overuse and contributes to the problem of high prices.
Lack of Competition
While many factors contribute to excessive healthcare spending and growth, a decade’s research points to prices as a significant driver. Specifically, price increases are far faster than other economic goods and services and are not commensurate with the health outcomes produced. Furthermore, patients need to get a say in how much they pay for their healthcare in the United States. The vast majority of Americans receive their insurance through employers, which means they do not make any actual consumer decisions about the cost of their coverage. This lack of choice limits the impact of competition and encourages providers to increase their prices. In addition, the largely unregulated nature of the healthcare system allows for massive price variation among hospitals. The Henry J. Kaiser Family Foundation (KFF) has reported that a single hospital could charge different commercial payers up to twice as much for the same procedure.
KFF has found that price increases are a more important driver of growth in healthcare costs than demographic changes or disease prevalence. This is because the lion’s share of healthcare costs are related to providing expensive medical technology rather than how much patients use it. Introducing new, innovative healthcare technologies often results in lower costs over time, but the initial price is high.
High Drug Prices
As a nation, the United States spends more on prescription drugs than most other developed countries. The high prices are primarily due to the lack of price transparency and the high cost of developing new drugs. The most vulnerable to these rising prices are those who pay cash for their medications and those who have insurance with drug coverage. However, everyone feels the impact when a pill’s price increases, including taxpayers and companies offering employees healthcare benefits. Drug costs are driven by market exclusivity granted upon FDA approval and patents protecting manufacturers from competition. This gives the pharmaceutical industry considerable monopoly power to raise prices. In addition, Medicare’s statutory rebates (based on a percentage of the drug’s net worth) create an incentive to set higher launch prices. A professor recently published research showing that the high costs of developing a drug do not translate to higher prices once it’s on the market.
Increasingly Complex Procedures
The inflation rate isn’t alone driving healthcare prices. Medically necessary procedures are expensive, and new equipment and supplies are rapidly increasing. Meanwhile, labour costs are also rising as physicians and hospitals consolidate to form large chains that demand higher wages. This pressure has prompted several policymakers to explore more direct strategies to control spending. These include price regulation (either setting or capping prices directly), global budgets (setting a target and leaving it to providers and payers to keep the target by constraining costs, utilization, or both), and spending growth targets (setting a target for overall expenditures and then leaving it to providers and payers to achieve it by constraining prices, volume, or both). While the causes of high healthcare prices are complex, a growing body of evidence suggests that rent-seeking, monopoly power, and barriers to entry in some markets can increase costs.
Further, more granular comparisons of prices for individual procedures show that US prices are substantially higher than in other countries. To combat these trends, providers and service organizations should focus on creating agile, resilient operations that emphasize rigorous operational execution and a keen focus on their patients’ needs. Additionally, they should implement innovative technologies to support medical professionals in their tasks by automating administrative work and reducing the need for human review of claims and denials. For example, new natural language processing and deep learning technologies can help reduce physicians’ time reviewing medical necessity denials, freeing up valuable hours to intercede for patients.
Higher Labor Expenses
While healthcare prices haven’t risen as fast as overall inflation, that is about to change. As patients start returning to doctors’ offices after avoiding them throughout the pandemic, they will likely face higher costs. This is largely due to a continued staff shortage and lower annual incomes for health workers. Hospitals have had to rely on contract labour to fill the gap, which has increased costs. A recent report found that in 2022, full-time equivalent (FTE) hospital contract labour expenses jumped by 257.9% compared to pre-pandemic levels. Aside from the abovementioned factors, healthcare costs are also pushed up by other economic forces. One reason is the phenomenon known as Baumol’s cost disease, which describes how sectors with relatively low productivity growth (such as healthcare) tend to see their prices rise faster than those in more productive sectors. Another factor is that most Americans don’t have many choices regarding their health insurance, which limits competition and drives up prices. This is especially true for those on the marketplace, where a recent analysis of 72 marketplace insurers’ early rate filings showed that most were seeking premium increases of at least 10 percent. With healthcare prices rising, consumers will likely face higher premiums and out-of-pocket costs. At the same time, providers and healthcare services organizations will have to manage their supply chains carefully to avoid overspending. That will require them to embrace new operating models emphasizing robust operational execution and resilience.
