Healthcare Costs Soar Above Overall Inflation

The average, per capita cost of providing healthcare services in the United States rose by 7.32% for the past 12 months ending in August, a rate of inflation wildly above the 1.1% overall inflation for the same period, according to new study by Standard & Poor's.

The new numbers are consistent with a trend that from August 2000 to August 2010 has seen healthcare inflation rise 48% while overall Consumer Price Index has risen 26% for the same period, U.S. Bureau of Labor Statistics data show.

"Given the last 10 years, no we are not surprised," Maureen Maitland, vice president of S&P Indices, says of the findings in the new report. "If you look at the public data that are out there and have been out there, the national health expenditure data, what we have seen is not only healthcare costs have basically risen over the last 10 years at a 7% rate. But the percentage of GDP has gone up dramatically too, because we are outpacing not only inflation but the rate of growth in GDP."

Maitland attributes the rise in healthcare costs to supply and demand; healthcare providers are charging more because they can. "Basically the demand for healthcare is high, and physicians and hospitals are trying to meet their budgets, and are able to put these rate increases through," she said.

A further breakdown of the data from the S&P Healthcare Economic Composite Index show that physician and hospital claims costs associated with commercial plans rose 8.66% for the 12-months ending in August, while similar claims associated with Medicare rose 5.08%—a 70% difference in the rate of increase, despite Medicare's sicker, older population.

Robert Zirkelbach, press secretary for America's Health Insurance Plans, said comparing medical inflation to overall inflation is not an accurate measure for explaining premiums increases. "There is inflation, but there is also utilization, new technologies, and price increases above that, particularly when it’s the result of hospital consolidation," Zirkelbach says. "A lot of studies recently [show] that hospital consolidation is leading to higher healthcare costs, meaning that some hospital systems are able to basically dictate the prices they charge for their services. That is why our members in some parts of the country are seeing rate increase requests from hospitals by as much as 40% and 50%."

Zirkelbach says commercial health plans are also bearing increased cost shifting from Medicare/Medicaid because of the recession. "We have seen that trend in both Medicare and Medicaid, particularly in a weak economy when you see more people relying on Medicaid -- that is shifting the costs to the private sector," he said.

AHIP did a study two years ago estimating that the average family of four paid a "hidden tax" of $1,500 each year to offset underpayments from Medicare/Medicaid.

Given the cost shifting and other pressures on commercial health plans, Zirkelbach says the S&P data do not undermine the claim that commercial plans do a better job containing costs than does the government, despite Medicare's older, sicker population. "I don’t think you can make that judgment. I haven’t seen any evidence to show that," he says. "Keep in mind the government simply dictates the price they pay for services and those costs get shifted on to employers and families in the private sector. It's administered pricing, is how it works."

Maitland said the S&P data reflect an increase in the per capita costs of commercial plans and Medicare, but not necessarily the "total basket" of Medicare costs.

"The total budget may actually be larger but for each person, it is government funded and the government will only allow a certain amount of increases each year. A lot of this simply has to do with government funding and what they will allow in terms of what they will pay," she says. "It's not saying anything about the size of Medicare versus the size of commercial plans. This is per capita."

Maitland said it's also apparent that the commercial plans are also cost shifting their costs to consumers. "If you happen to have commercial health insurance, each of us is paying approximately 9% more than we did for the same services last year," Maitland said. "The cost is not just to the insurance plan, but it's our deductibles and copayments, all of that that is going on. They are passing some of the extra cost on to the consumer directly."

Maitland said the sweeping healthcare reforms passed by Congress this year have yet to take effect and were not a factor in the cost increases.

Also this week, the Thomson Reuters' Consumer Healthcare Sentiment Index for September, which showed that Americans‘ confidence in their ability to obtain and afford healthcare rose for the second consecutive month, reversing a 5% downward trend that had prevailed in the first half of the year.

"It’s too early to call this a trend, but two months of increased confidence may auger growing optimism as we approach the end of the year," said Gary Pickens, chief research officer at the Thomson Reuters Center for Healthcare Analytics. "The next several months will show whether this optimism has legs."

In September, for the second month in a row, consumers expressed increased confidence that they could access and pay for healthcare in the next three months and fewer people reported that they had postponed or cancelled treatment in the past three months. The Consumer Healthcare Sentiment Index is based on responses from a survey subset of 3,000 respondents each month. Its baseline measurement of 100 was set in December 2009.