This blog is about healthcare economics- factors that drive costs. It is NOT about the Affordable Care Act (“Obamacare”). Your opinion, whatever it is, is at least as good as mine.
Five factors are the main drivers of healthcare pricing:
• Demand
• Supply
• How compensation is determined
• Cost shifting
• Pricing opaqueness
Let’s look at each of these a little closer.
Demand.
If you add, say, 10 million people to the health rolls, especially the less healthy, demand for services and drugs has got to increase. Unless there is slack in the system, prices would be expected to rise.
Supply.
This upward price pressure can be lessened by increasing supply through, say, increasing the number of hospital beds or practitioners (doctors or other). Supply can also be increased relatively by reducing the number of hospital days required for specific events, or by inventing drugs or less invasive methods of treatment.
How compensation is determined.
Much compensation is based on “fee-for-service”. This creates reverse incentives for providers, who are paid for procedures, not for outcomes.
Cost shifting.
Hospitals and providers do not have to charge everyone the same for the same services. This creates a system where some customers, like the Federal government or Blue Cross Blue Shield insurers, enjoy pricing that is often unprofitable, and others are charged more to make up the difference.
Pricing Opaqueness.
Most providers, especially hospitals and surgical centers, do not quote prices in advance, even for routine procedures. This makes it impossible for even the best informed consumers to make rational choices.
In addition, at least two other factors cause major inefficiencies:
• Each state regulates its own insurance. Therefore, there are not national insurance plans. Instead, there are 50 different plans for each national provider, and then many different forms.
• The government is currently prohibited from negotiating with drug companies over pricing. Consumers are prohibited from buying their drugs by mail-order from other countries, where the same drugs often cost much less.
Whatever your views, these are the main factors affecting healthcare costs. There are other, philosophical issues, but these are the primary economic factors.
I hope this helps clarify the issues for you as the debate continues.
Richard Levy is President of HBD, Inc. He studied economics and has been involved in the healthcare industry for over 30 years.
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