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Prices Still Responsible for High US Healthcare Spending

In a follow-up study to “It’s the Prices, Stupid,” researchers still found prices to be the reason behind the rapid acceleration of US healthcare spending.

Healthcare spending and healthcare prices

Source: Thinkstock

By Jacqueline LaPointe

- Prices are still the primary reason healthcare spending in the US more than doubled from 2000 to 2016, revealed a new follow-up study to the landmark 2003 article titled “It’s the Prices, Stupid.”

The article’s original authors Gerard F. Anderson, Peter Hussey, and Varduhi Petrosyan recently reunited to determine what the driver behind America’s exorbitant healthcare spending was fifteen years and many healthcare reforms later.

“The conclusion that prices are the primary reason why the US spends more on healthcare than any other country remains valid, despite health policy reforms and health systems restructuring that have occurred in the US and other industrialized countries since the 2003 article’s publication,” the authors concluded using updated data from the Organization for Economic Cooperation and Development (OECD).

The data showed that the US is still providing significantly fewer resources per capita versus the OECD median country. And since the US is not consuming greater resources compared to other countries, the researchers concluded that higher prices are accelerating healthcare spending growth.

US healthcare spending per capita was $9,892 in 2016, up from just $4,559 in 2000, which was the time period in the 2003 article. The more recent US spending level was:

  • 25 percent higher than that of Switzerland (47,919), the country with the next highest spending per capita
  • 108 percent greater than that of neighboring Canada ($4,753)
  • 145 percent higher than the OECD median

READ MORE: Addressing Productivity, Labor to Bend the Healthcare Cost Curve

Furthermore, the US spent 17.2 percent of its gross domestic product (GDP) on healthcare in 2016, while the OECD median was just 8.9 percent.

Despite higher spending compared to all other OECD countries, the US still devoted fewer healthcare resources, researchers pointed. Compared to the median OECD country in 2000, the US reported fewer physicians per 1,000 population, physician visits per capita, and acute care beds per capita, as well as fewer hospital admissions per 1,000 population and acute care days per capita.

By the 2015 to 2016 period, the US also had 26 percent fewer hospital beds per capita, 20 percent fewer practicing nurses, and 19 percent fewer practicing physicians per capita versus the OECD median country.

“Because the US is still not devoting more real resources to medical care than the typical OECD country, we believe that the conclusion that ‘it’s the prices, stupid,’ remains valid,” the authors wrote. “What is different between 2003 and 2016 is that the differential between what public and private insurers pay for healthcare services has become wider.”

A new factor in the updated study is the calculation of the differential between the prices paid in the public and private sectors. Researchers found that the US financed about half of its healthcare from private payers in 2016, while the OECD median financed just one-quarter from the private sector.

READ MORE: Price Not the Only Driver of High Healthcare Costs, Research Shows

For most OECD countries, including the US, the percentage financed through the private sector is actually down compared to 2000. In terms of per capita, public healthcare spending in the US is greater than in four of the five OECD countries that financed over 80 percent of their funding from public sources.

However, the gap between what private and public payers pay for medical services is widening in the US. The price differential in 2000 was about 10 percent.

By 2017, the Medicare Payment Advisory Commission (MedPAC) reported that private payers paid prices that were 50 percent higher than what Medicare pays, researchers pointed out.

“Because the differential between what the public and private sectors pay for medical services has grown significantly in the past fifteen years, US policymakers should focus on prices in the private sector,” researchers suggested.

In light of rapid hospital merger and acquisition activity, policymakers doing just that. Policymakers are turning their healthcare cost reduction efforts to focus on prices paid by private insurers

READ MORE: 3 Strategies to Decrease Low-Value Care, Healthcare Costs

The industry recorded the highest number of hospital merger and acquisition deals in 2017 with 115 transactions, according to data from consulting firm Kaufman Hall. And 2018 is likely to beat that record with 50 transactions announced by in the first half of 2018.

But the deals may not be benefiting the patient, research has shown. The same 2017 MedPAC report also found that prices may be higher after a merger or acquisition because hospitals and health systems feel less pressure to reduce costs post-deal. Using their greater market power after the deal, the providers can negotiate higher claims reimbursement rates with private payers and leverage their size to be included in payer networks.

Another study from the Robert Wood Johnson Foundation also found that hospital consolidation generally boosts prices, with some price hikes exceeding 20 percent.

Hospital groups like the American Hospital Association argue hospital merger and acquisition deals are the future of healthcare and actually decrease prices and support value-based care. In its own 2017 study, the AHA reported hospital mergers reduced operating expense per admission at the acquired hospitals by 2.5 percent.

But policymakers are still coming down on hospital mergers in an effort to reduce costs. Merger and acquisition proposals are facing greater federal and state scrutiny. And several House Representatives recently called on MedPAC to conduct a formal investigation into how hospital mergers increase prices, particularly for privately insured patients.

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