Tuesday, September 25, 2012

Have We Bent the Cost Curve? Not So Fast

The Health Care Cost Institute issued a new report today that shows the rate of growth of (private) health care spending trending up again after a couple of years of slower growth.   This casts some doubt on contentions that the slower growth we've seen is due to cost control efforts finally taking hold. Obviously it's too soon to know for sure, but this reversal in trend is disturbing.

What's driving the increase? Prices are the answer, as previously. We don't know what's behind the increase in prices, but there are a number of possible candidates, including increased consolidation and exercise of market power by providers, overall price increases in the economy, and the ACA 80/20 rule. Provider consolidation has been increasing, and we know that this leads to substantially higher prices. The 80/20 rule specifies that health insurers can allocate no more than 20% of their total expenses to administration; the rest has to go to medical care for beneficiaries. Obviously the intent is to moderate administrative expenses, but this regulation can be complied with either by controlling administrative spending or increasing spending on medical care. It's possible that an unintended consequence of this rule has been to drive up health care spending, although I need to be clear that this is just speculation at this point. Some careful research is necessary in order to determine what the major factors are driving these price increases.

Another important finding in this report is that spending on children's health care (age 18 and under) rose faster than for any other age group. This continues a trend that was discovered in the 2010 HCCI report. This indicates that this is not simply a one time phenomenon, but rather an ongoing trend. Obviously this is cause for concern and we need to dig in to determine what's behind this.

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