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Why do Health Care Costs Continue to Rise?

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A recent checkup revealed that I had a host of medical issues requiring repeated visits to the doctor as well as prescription medications and lab tests in order to improve my overall health. While I do have insurance, these health issues, with their mandatory co-payments and deductibles, resulted in out-of-pocket expense. Adding these medical costs, along with those of my spouse and my allergy-prone teenage daughter, I estimate that my family expended almost 20% of our net monthly income to cover them. That may not seem like a lot, but it does add up in these economically uncertain times, and has a significant impact on our family budget.

Adding up the costs, I started to think about recent efforts to reform the way in which health care is administered in our country and why they have met with so much resistance. If, as seemed to be the case from my own experience, health care costs every year take an increasingly larger bite out of the average American’s income, one would expect a rising chorus directed at keeping those costs down. Oddly enough, much of the debate over health care reform centers on forcing someone to purchase insurance under the Affordable Care Act as opposed to the economic advantages to the individual and the government in having universal coverage for all Americans.

Trying to understand why many Americans favor an individual right not to choose coverage (Americans have, after all, been forced to carry automobile liability insurance for years, without quibble) over lower costs and their own economic advantage, I began to look into why health care costs are so high. According to the 2011 Milliman Medical Index, the total cost of health care for a typical family of four covered by a preferred provider plan was $19,393; an increase of $1,319, or 7.3 percent over the cost for 2010. This amount was double what the same family would have needed less than a decade ago, in 2002, when the cost was $9,235. Of the total 2011 amount, the average employee paid an all time high of 39.7 percent, or $8008. That is certainly not small change at a time when the economy has stagnated and unemployment is high.

Why health care costs continue to rise is not easily answered or understood. Many factors have been cited as contributing to the high cost: the fear of medical malpractice lawsuits, doctor and hospital fees, overuse of unnecessary tests and procedures, extremely high overhead and administrative costs, over-emphasis on treatment as opposed to preventive care, and a quantity- not quality-based system for doctor and hospital reimbursement (they are paid more for how much service they provide) have all been named as potential culprits.

Underlying all of these reasons, however, is the fact that prices for medical goods and services continue to rise because they can. In our market-driven economy, providers of these goods and services like pharmaceutical companies are responsible to their stockholders to show a yearly increased profit. With this goal in mind, prices for products are increased, often without there being any need to do so, other than enhancing the bottom line. According to the Business Journal, for example, the price of a drug that halts premature labor in pregnant women skyrocketed from $10 or $20 per dose $1500 when a Missouri-based pharmaceutical company obtained an exclusive sevenyear patent to sell it. The drug’s price was raised even though the company did not have any associated research or development costs to keep it on the market. In the end, insurance companies will continue to pay for the drug for patients for whom it is medically necessary, but will pass on the added cost by increasing subscriber premiums.

What is clear is that unless something is done to curtail it, the inexorable climb in health care costs will continue. Ultimately, these rising costs will have an increasingly devastating effect on ordinary Americans. Unable to financially bear the larger premiums, co-pays and deductibles, many individuals will put off obtaining needed medical care, endangering their health. That many citizens do put off dealing with health issues because of financial concerns is very sad commentary on the state of the health care industry in the world’s wealthiest nation.

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  • Dr. Joseph S. Maresca

    Reducing junk food consumption, drinking and smoking will go a long way to reducing costs.

    The Hill Burton Program is an existing free or significantly reduced cost offering with a sliding scale fee arrangement based upon income up to $100,000. Medical schools receive a forgiveness of the mortgage loan payment in exchange for lower cost or no cost service by medical school students and their teachers.

    The program has worked well for 65 years. Since the medical school funding structure tends to be non-profit, the costs are lower structurally.

  • Baronius

    The problem isn’t the market-based economy. In the case you describe, the company was able to get an exclusive license to produce the drug Makena through the Orphan Drug Act of 1983. The law was written to bypass the market system, giving incentives to companies to develop and produce “orphan drugs”, drugs that address rare problems (and therefore could not possibly be profitable). The law is generally considered to be a success, but the classification of drugs is imperfect, and some drugs turn out to be effective treatments for other conditions. For example, Botox was originally considered to be an orphan drug, and therefore unprofitable, but I think Allergan has managed to turn a profit on it. So, in general, when you’re dealing with a muddle of market incentives and governmental interventions, don’t assume that any and all problems you encounter are caused by the market.

  • Leroy

    The problem is market-based economy. Such economies are red-meat for monopolies who find them easy to dominate and turn into captive markets.

    Malpractice, defensive medicine, etc., are red herrings, which, when investigated turn out to be economically trivial. The real villain is monopoly privilege, whether from favorable patent extension or simply neglect of anti-monopoly law, that allows the kind of price fixing that yields obscene profits.

    Especially obscene are profits derived from drugs and medical procedures developed at public expense, using everyones tax money, in our Universities and NIH labs and turned over to monopolies for market development and exploitation. Especially when those same taxpayers are denied the benefits of drugs and procedures whose development they paid for.

    We need Universal Health Care.

  • Granted, KV Pharmaceutical, the company involved, did in fact receive an exclusive patent (no other company can sell the drug) pursuant to the Orphan Drug Act. And yes, that law was designed to give incentives to companies to come up with drugs to treat rare diseases and conditions. But the drug had already been on the market for years and its users were able to obtain it for far, far less than the price KV charged once it became the company’s exclusive property. Additionally, KV did not have any research or development costs for gaining a monopoly on the product, it simply had to continue to produce it.

    KV’s CEO at the time stated that the new cost was justified to avoid the estimated $50,000 cost of mental and physical disabilities caused by very premature births. In other words, the company substantially raised the price of the drug based on a speculated price someone else would have to pay for potential disabilities that may or may not occur.

    If this is not a case of market forces at work, I don’t know what is!

  • Baronius

    Ros, you’re saying that the price was low when companies were able to compete with each other, and prices went high as soon as the government intervened to create an artificial monopoly. How is this the market’s fault?

  • Steve

    Maybe the US should follow the UK model and adopt a National Health Service, where all have the right to health care. For those who wish to pay for going ‘private’ they can still do so of course, but at least access to good health care doesn’t come down to how rich a person is. The NHS isn’t perfect by any means, but it does have its plus sides.

  • Clavos

    Malpractice, defensive medicine, etc., are red herrings, which, when investigated turn out to be economically trivial. The real villain is monopoly privilege
    Pretty cool, Leroy. You introduce a concept to the discussion (red herrings) and in the same breath give us an excellent example (monopoly privilege) of one!

    And all without a single shred of evidence in either case!

    Well done!

    Have you ever considered a career in politics? You’re remarkably suited for it.