Is Health Industry Price Inflation Really At a Historical Low?

One hesitates to make too much of a single report, but the Altarum Institute’s July Report, “Health Care Price Growth at 20+ Year Low,” certainly commands one’s attention.  According to Altarum’s analysis, the health sector pricing trend ran at a 1.0 percent annual rate in May 2013, lowest since January of 1990.  What is striking about Altarum’s health care pricing trendline is that it has declined for the last three years in spite of an alleged economic recovery.

It also runs parallel to a subsiding utilization trend, suggesting that the health sector has been unable to offset reduced utilization with price increases.  Since the beginning of the recession, pricing has subsided from double the rate of the GDP deflator to parity, and it has closely tracked the deflator with only two deviations for more than eight years. Clearly, something more than the recession is at work here.

These trendlines confirm what this observer sees from his contacts in multiple sectors of the health industry:  a widespread and durable “top line flu”.  The growth in enterprise revenue for most health providers and manufacturers has been static (e.g. very low single digits or actually declining) over the last two years.  Most investor-owned hospitals, pharmaceutical companies, device manufacturers, and physician practices (pretty much everyone except the consultants and IT vendors) have reported both revenue stasis and earnings compression.

My economist friends point to rising consumer copayments as inhibiting price increases.  The Kaiser Family Foundation has reported almost a quadrupling of the number of covered workers in high deductible health plans (from 5 percent to 19 percent) since the end of the recession.  It is also possible that a disinflationary mindset has inhibited providers and suppliers from seeking outsized price increases to compensate for lost sales volume.  For suppliers, the marked decline of “physician preference” marketing has also hurt both sales and margins.

Hospital pricing. Performance of hospital prices will provide more fodder for those concerned about hospital consolidation pushing prices up.  On the one hand, overall hospital prices rose an annualized 1.8 percent for May 2013, fractionally higher than the consumer price index (CPI) at 1.4 percent.  However, when one strips out the “administered price” portion (Medicaid and Medicare), hospital prices to privately insured patients rose 4.8 percent annualized in May, nearly five times rate of health prices as a whole.  Altarum suggests that cost shifting might explain this significant disparity.  However, even this increase to private patients was not enough to raise overall health costs significantly.

Government payment to hospitals has trended lower for multiple reasons.   Many state Medicaid plans have cut hospital rates in the past several years to help balance state budgets.  And in addition to the ACA’s mandated reductions in hospitals’ disproportionate share payments and DRG updates, the sequester took a significant further bite out of DRG payments during the winter.

Since most hospital contracts with private insurers are multi-year, it’s difficult to argue that compensating upward revisions in private health insurance contract rates would yet be reflected in national economic statistics.  Moreover, not all hospitals are part of systems capable of exerting pricing power on private health plans.  Have-not hospitals have had their prices constrained by payer contracts, compensating for the effect of leverage by market hegemons.  We’ll have more evidence in a year to confirm or disconfirm the cost shifting/pricing power hypothesis.

There’s another indicator of a tougher hospital pricing environment.  According to the Advisory Board’s Dan Diamond, hospital employment has actually contracted in one-quarter of the monthly jobs reports from the Bureau of Labor Statistics since January 2009, including a 6000 person force reduction in May, 2013.  On balance, hospital executives would much rather raise rates than lay off staff, so the fact that the nearly unbroken decades-long expansion of hospital headcounts is faltering suggests a very difficult pricing environment for hospital services.

Health insurance premiums. Broad based relief from rising prices across the health sector will put the behavior of health insurance premiums in 2014 into high relief.   Small employers and individuals facing double digit premium renewal increases will legitimately wonder what justifies them if both healthcare prices and utilization are essentially flat.

There is no actuarial roadmap to guide health insurance pricing in an environment where most traditional underwriting strategies have been outlawed by ACA. Guaranteed issue and guaranteed renewal, elimination of lifetime caps, prohibitions on pre-existing conditions restrictions, enrollment of children to age 26 on their parents’ policies all have costs that must be spread across insurers’ risk pools.  Optimism about private insurer pricing in 2014 has given way to watchful waiting and anxiety.

Yet the Altarum Report confirms that if one is to embark on an aggressive program of health insurance expansion and public subsidy, there could hardly be a more propitious time than right now.   Sustained relief from rising health costs could help alleviate fiscal pressure on government budgets and on the broader economy.

Jeff Goldsmith is president of Health Futures Inc, which specializes in corporate strategic planning and forecasting future health care trends.

Goldsmith, Jeff., Health Industry Price Inflation At Historical Low, Health Affairs Blog, 1 August 2013. Copyright ©2013 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

15 replies »

  1. Inflation is still inflation. Insurance premiums have been to high for too long. Slowing of the rise of the cost of these premiums is no progress and no bargain. Healthcare costs = healthcare premium dollars. Start there!

  2. Good news! We’re still drowning in health care costs, but the tide is rising more slowly.

    Bad news! We’re still drowning. And the tide is still rising.

    For additional tidal information, reading a second Altarum July brief is recommended — on health care spending, rather than prices. This second brief reports that that national health expenditures (NHE) increased by 4.2 percent in the most recent twelve months to reach 18.1 percent of GDP.

    (And a third July Altarum release projects that NHE could reach 25 percent by 2025 and 25 percent by 2070.)

    Glug, glug, glug…

  3. If you mean information technology, there seems to be universal consensus that it has increased clinician documentation time, as well as added an expensive new layer of minders and keepers of the IT infrastructure. IT has resulted in an upward shift in the skill set, therefore enabling hospitals to lay off lower skilled nurses, orderlies, aides and secretaries. But it isn’t a big victory for operating cost reduction if you pay for that force reduction with a seemingly permanent increase in IT spend and more expensive people, which is the pattern.

    As I’ve previously argued in this space, the rest of hospital technology hasn’t changed materially since 1998. . . . https://thehealthcareblog.com/blog/2013/05/21/hospitals-twenty-first-century-time-warp/

  4. It’s always difficult to pick apart such numbers. Do you see any impact from increased use of technology – which could at least in theory support some of the reduction in headcount? What kind of staff have been laid off (or not replaced)?

  5. “I keep saying that people need to understand and recognize that resources are finite and there are lots of other worthwhile priorities both public and private that need to be financed.”

    Life is finite too. Let me ask, why are these not for profit hospitals spending $$$$ billions on advertising when these funds could be purchasing medications and care for the indigent? You failed to consider that health care costs may be going down because the indigent are deprived of care and sent home, deprived surgery, deprived first line medications because of money, and get no follow up care

  6. Jeff –

    I agree with your comments about both the post-acute “circus” and drug company pricing power around new drugs, especially the very expensive biologics to treat cancer, MS, rheumatoid arthritis, and a few other diseases.

    Billing and service abuses by nursing homes, home health care agencies, rehabilitation facilities and hospice providers probably need to be addressed by greater use of outside analytics firms to help identify potential fraud before payments are made and recovery audit contractors to claw back inappropriate payments by the Medicare and Medicaid programs. If these two programs spent a little more on high value administrative costs, maybe there wouldn’t be so much fraud in the first place though it’s difficult to quantify with any precision.

    Countervailing power against high prices for new specialty drugs needs to come through more use of QALY metrics and a willingness to refuse to pay for certain new drugs if they are deemed too expensive. Just because a drug wins FDA approval by showing that it’s more effective than a placebo doesn’t mean that taxpayers should pay whatever a drug company chooses to price it at. Wealthy people who want the drug even if it’s not covered can self-pay. I keep saying that people need to understand and recognize that resources are finite and there are lots of other worthwhile priorities both public and private that need to be financed.

  7. The data in the report is flawed because it fails to consider the private transactions and insurance costs.

    The aggressive hospice work by the angels of death have decreased end of life costs. I like their expression to hasten the morphine therapy: “the patient is actively dying”.

  8. Barry has figured this out. NOT TO MENTION, the really affordable exchange plans will be narrow networks. AND Medicare Advantage plans, which I’m about to join in October, don’t need to include everyone- they just need the doctors and hospitals the individual beneficiary uses.

    SO the growth in demand will be in networks that cannot be shaken down by the unavoidable hospitals and their medical staffs. Hospital pricing power is ebbing quickly.

    Rather than banding together to bargain with health plans, docs seem rather to want shelter from economic risk in hospitals, or to go off the grid altogether like several regulars on this site. So physician incomes seem likely to fall or at best stay even.

    So, BevMD and others, this might go on for a while. . .

    The biggest inflation risks are in pharma, where expensive new drugs will continue to have pricing leverage, and in the post-acute “circus” where there is presently no rhyme or reason.

  9. It’s already lasted eight years. Go look at the charts in the Altarum report, linked from my blog. Not changing in a heart beat. It’s been a steady downward glide. . .

    I think it’s a durable disinflationary trend,though one wonders about the discontinuous event of ACA enrollment next year and whether providers will try to break out of the doldrums on the back of the big health plan rate increases. . .

  10. Our economy is at a 20-year low as well, maybe the correlation is economic and not policy?

  11. Not that long ago, employers strived to do their best to keep employees happy and employees preferred broad network insurance plans that included access to the most famous hospitals and the large hospital systems. Since the hospitals knew that they were “must haves” for the insurance networks, they exercised their market power to raise rates at a faster rate than general inflation year after year.

    As the cost of health insurance continues to escalate, employers are now focused more on affordability and employees appear more willing to accept tiered network and narrow network insurance plans than in the past. There is probably also a greater appreciation among employees that the more expensive health insurance is, the less room there is for their employers to raise salaries. As these tiered network and narrow network insurance plans gain traction, so does countervailing power that allows insurers to better resist unreasonable price increases. The proliferation of high deductible plans probably also contributes to lower utilization of services at the margin.

  12. Optimism about a safe and effective- fair and equitable – genuine US health care (not disease care ) system that is affordable and economically sustainable – one that doesn’t disrupt the entire US economy is a moral and practical imperative at this point.

    We cannot believe ,even for a minute, that we could possibly fail to fix our very broken system. Because if healthcare fails -so goes the nation. The clock is ticking as Jeff Goldsmith implies

    Dr. Rick Lippin

  13. Agree with Michael, plus, this could all change in a heartbeat, the minute our attention is turned elsewhere. Healthcare prices have been resistant for so long I won’t believe it till it’s lasted at least 5 years and maybe 10.

  14. Given the absurd price increases the past several years, this is not cause to celebrate.