It’s the Prices

Ezra Klein on a new study from the Health Care Cost Institute:

Employers typically have tried to control costs by reducing the volume of care delivered, whether that means higher co-pays for doctor visits or using prevention to catch costly diseases earlier.

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.

“We’ve done a good job cutting back on length of stay,” Newman said. “But if quantity is cut back and prices are going up, you’ll still see overall spending increase.”

Health economists say this reflects a health-care market in which employers and insurance companies have exerted little downward pressure on the cost of medical care.


  1. The easiest, low hanging fruit to reduce medical costs is tort reform. If you cap the damages for medical errors and put legislation in place to prevent the numerous frivolous lawsuits which are nothing more than shakedowns/extortion from the lawyers, you will have doctors paying less for insurance and there will be fewer medical tests for defensive purposes which will reduce costs.

    Unfortunately, neither side has the stomach to adopt this

    • Jon Geeting says:

      The entire cost of the medical liability system – including lawsuits, including “defensive medicine” – is about 2% of total health care spending, or around $55 billion a year. It’s not nothing, but even if we did away with all of that spending (including on legitimate malpractice suits, which are the majority), it still wouldn’t seriously dent our health spending. It’s all about the price inflation.

  2. First, I must point out that again Jon fails to understand how business owners think and operate. The first thing any business owner does when faced with increasing costs is to shop for a lower cost provider. Cutting benefits for our employees (as cited in this post) is done only as a last resort. But since he thinks business owners are evil, he automatically goes to the negative and states that as fact. Sorry Jon, you’re wrong. Please talk to actual business owners instead of policy people and academics – you’ll learn a lot.

    So in addition to tort reform, the other real easy one is competition – open up the markets so that insurance companies compete for business. The surest way to control costs is to make firms that write the checks compete for business.

    Jon will argue that competition will result in a ‘race to the bottom’ and only crappy plans will be available. When asked numerous times to cite just one example of where competition in any industry resulted in this race, he has been silent. He’s silent because it’s not true, he knows it’s not true, and he tries to obfuscate the matter with this kind of hogwash.

    • Jon Geeting says:

      You are really kind of stupid about statistics aren’t you? You do realize this is from a study of employers in the aggregate? And that it is more rigorous than your park bench wisdom about how business owners think, since it actually looks at what they do in the aggregate?

      The reason more competition between insurers doesn’t work to control costs is that insurance markets are all about leverage. I don’t see how you can deny this. There’s literally no example of a country with lots of private insurer competition controlling costs better than a single insurer. The reason is straightforward – it’s about market power. A monopsony insurer has the market power to hold down costs, and when you fragment the market power across a lot of different payers, then hospitals have more leverage to charge more. Look at the evidence, don’t just give me platitudes about what you think competition is supposed to do.

  3. Jon what I read (which is the same article you did) does not comment on what other steps business owners take, in what order they take them, and how it all flows through.

    You are assuming all business owners do is screw employees. You’re wrong.

    Do benefits get cut? Yes they do. Is that the first thing business owners look at? In some cases, probably so. But for the thousands of business owners I’ve worked with over several decades, no it isn’t.

    Again you’ve not cited one example of a ‘race to the bottom.’ So you’re surrendering on that point?

    • Jon Geeting says:

      I’m not blaming business owners. I’m blaming the lack of risk pooling in America. The paper says business owners also try to reduce costs through prevention – stuff like smoking cessation and gym memberships, etc.

      The “race to the bottom” point is about national insurance markets. I do not want the insurance market to end up like the credit card market – with firms clustering in the state with the weakest insurance regulations. I’m fine with a national market if the federal regulations for what constitutes an insurance plan are the floor, not the ceiling. If federal regulations are the floor, then by all means sell plans across state lines. But the issue continues to be that the risk pools are too small to exert market power over providers.

  4. By using the term ‘ceiling’ you’re creating a race to the bottom which, again, has never happened. Not in the credit card industry either.

    There are cards all the way from the bottom (cash secured for poor credit) to the Visa Black Card with a $500 annual fee, and more. There will always be options for people who want more than the floor Jon. Always.

    The operative question is to where to place the floor. The Feds screwed that up too – example, they outlawed low premium / limited coverage college insurance programs. Nice little policies that helped students out, but our Dear Leaders banned them.

    And if you’re not blaming business owners, then stop using language that blames business owners. The first line you linked to:

    “Employers typically have tried to control costs by reducing the volume of care delivered, whether that means higher co-pays for doctor visits or using prevention to catch costly diseases earlier.”

    States categorically that the first thing business owners do is increase co-pays on their employees.

    Stop beating up the very people who have to generate the income to pay for all the shit you want to do.

  5. The point of using the federal regulations as a floor is that we’re not just trying to bring down the price of insurance – we’re trying to bring down the final prices insurance plans pay for, an increase coverage. People should be able to consume more health care than they do now *and* pay lower prices for it. By fragmenting the payer base into a bunch of plans that cover hardly anything, we lose market power relative to providers, and end up getting less for our health care dollar.

    And again, the article isn’t trashing employers. Employers are struggling with the same high provider prices everybody else is. If you don’t have the large risk pool that allows you to act like a monopsonist and negotiate lower provider prices, then the only alternatives are reducing coverage or raising employee premiums.

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