Code Red: Two Economists Examine the U.S. Healthcare System

May 21, 2012

HCCI Cost Report: Some Answers, and More Questions

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 11:04 am

The Health Care Cost Institute (HCCI) has released its first “report card” and the findings are provocative, even as they raise a host of additional questions. HCCI is an independent institute governed by academics and actuaries whose key objective is to promote research on the drivers of health care spending. (Full disclosure: I am on the HCCI governing board and direct the HCCI scientific review committee. Aetna, Humana, and United contributed their data on employer sponsored insurance.) Major findings of the HCCI report card include:

1) Per capita healthcare spending for beneficiaries under age 65 was $4255 in 2010, an increase of just 3.3 percent from spending of $4120 in 2009. This represents a substantial easing from historical medical inflation, though it is still double the general rate of inflation.

2) Spending by insurers rose 2.6 percent while out of pocket spending by beneficiaries increased 7.1 percent.

3) Utilization of services is mostly trending down. Inpatient admissions and outpatient visits both declined by over 3 percent. Outpatient procedures increased by 2 percent while other professional procedures and the number of prescriptions was largely flat.

4) The prices of various medical services continue to increase. Prices per inpatient admission rose by 5 percent; prices for outpatient visits increased 10 percent.

What does one make of this pattern? We may finally be seeing the results of a decade-long experiment with higher patient copayments. Certainly, insurers are bearing proportionately less of the financial burden while patients bear more. More importantly, higher copayments seem to be reducing overall utilization, so that total costs remain under control. It seems that the centerpiece of the consumerism movement in health care – more individual responsibility for spending – is bearing fruit. To the extent that moderation in spending by insurers allows employers to raise wages (instead of spending more on benefits), beneficiaries will enjoy the financial benefits of their own restraint. But the fungibility of wages and health spending is a sound theory supported by only a few studies (largely due to the difficulty of designing an appropriate study). So all we can say for sure is that someone is benefiting from reduced medical spending.

The spending pattern is consistent with the reduction in utilization. People who pay more out of their own pocket are less likely to seek medical care. The HCCI report card does not include quality metrics so we cannot tell if this is purely a reduction in moral hazard or something more sinister. (The famous RAND study found little evidence of poorer outcomes except among chronically ill low income beneficiaries; one should not rule out any pattern of outcomes based on the HCCI report card.)

Finally, the increase in prices is not what one would expect from sellers facing declining demand. Perhaps medical providers have sufficient market power to continue to increase prices. But perhaps this is just another side of the reduction in moral hazard – if healthier people stop buying medical services, the costs of treating those who remain the system must increase. If the market power explanation holds water, then we must redouble our efforts to promote competition if we are to rely on markets to restrain spending.

Taken together, the HCCI evidence suggests that important changes are taking place in the healthcare system, changes that might auger the end of decades of health spending inflation. But the emphasis is on “might;” no one should believe that one year of promising cost data represents a trend. Besides, the HCCI report raises as many questions as it answers. Are employees getting the benefits of the new austerity? Is quality being jeopardized? Why do prices keep increasing even as utilization falls? Fortunately, HCCI will soon make its data available to scholars who may be able to shed light on these critical questions.

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