Why is the Cost of Medical Care Increasing So Fast?

As a follow-up to Friday's post about the stand-off between health insurers and regulators over premium increases in Massachusetts, I thought it would be appropriate to discuss why medical costs in that state are increasing so quickly.

In March of this year the State Division of Health Care Policy held a hearing on the reasons behind increasing medical costs in the Commonwealth. One of the people testifying was Paul Ginsberg who is Director of the Center for Studying Health System Change located in Washington. D.C. Dr. Ginsberg said the major factor behind provider price increases was the absence of demand side restraints which he detailed.

• Extensive third-party payment

• Purchaser demands for broad choice of providers

• Limited interest in narrower networks where offered

• “Must-have” providers face little risk of network exclusion

• Benefit structures provide few patient incentives to choose low-priced providers

• Little use of tiering for hospitals/physicians

He also cited increasing consolidation of providers which as increase their leverage in contract negotiations. Studies in Massachusetts have shown that certain providers because of their prestige and market position negotiated reimbursement rates of up to 300% more for the same procedures as other hospitals.

What can done to combat these developments? Ginsberg advocated for insurance benefit structures that give members an incentive to use lower cost/high quality providers. He also cited the need for price transparency, bundled pricing and regulation of provider prices. As I mentioned in a previous post, Maryland has regulated hospital pricing successfully for over 30 years and perhaps such a program could work in other states.

Massachusetts is now advocating more bundled payments with the Blues Plan there leading the way but this solution will take years to have an impact. Developing high performance networks is easier said than done as providers all believe they should be included. I know from my experience at working at a provider owned health plan every time I mentioned high performance networks to our Director of Provider Contracting she told me it could not be done because of the politics. But it can be done as Priority Health in Michigan has shown.

So I suppose the solution to increasing provider costs will not occur anytime soon and will be a struggle.