Per Capita Health Costs not the Full Story

Last week, the White House Council of Economic Advisers (CEA) reported that since 2010, inflation-adjusted per-capita health-care spending has risen at an annual rate of 1.3%-- the lowest annual rate of increase in fifty years.  The report indicated that the spending slowdown extended to every sector in health care-- hospitals, physicians, drugs, home health/nursing care, private insurance, and others. Compared to prior periods wherein per capita increases were higher--=4.5% annually from 1965-2010, +3.9% from 2000-2007, and +1.8% from 2007-2010, the trend looks promising.

But the per capita number doesn’t tell the full story. In fact, for most Americans, especially those with private insurance, it’s irrelevant for two reasons:

 Total health costs are substantially higher than per capita costs. For 35 years, health costs have exceeded the overall U.S. GDP by an average of 2.4%--the result of higher costs for hospitals, drugs, long-term care and other services and higher utilization especially in the Medicare program for seniors that adds 10,000 new enrollees daily. If per capita increases slowed to zero, total health costs would continue to increase and stress the overall economy. For the same period cited in the CEA report, total health expenditures increased at 4% annually due to increased demand and because health care products and services are expensive.

Per capita health cost increases are disproportionately passed through to individuals and families with private insurance. Per capita health costs are not evenly spread across the population. The 102 million covered by the government (Medicare, Medicaid, military health) pay less than costs for the doctors, hospitals, drugs and supplies their enrollees use. The 48 million who lack insurance pay less than 10% of their costs out-of-pocket resulting in cost shifting to taxpayers and mark-ups assessed those with private insurance coverage. (Bigger companies pay lower mark-ups than smaller). So, per capita increases are actually passed on to the 160 million who purchase insurance in the form of higher premiums, higher co-payments and deductibles, and higher out of pocket costs for services not covered by their insurance. Thus, the sticker shock employers and their employees see in annual premiums:

 Cumulative increases: 2008-2013: (Kaiser, Bureau of Labor Statistics)

  • Overall rate of inflation: +11%
  • Worker earnings: +16%
  • Worker contribution to health insurance premiums: +63%
  • Health Insurance Premiums: +79%

 The good news is that the per capita cost slowdown means the health system is becoming more efficient. The declining operating margins hitting doctors, hospitals and long-term care providers and unit costs for supplies, technologies and drugs evidence the impact of lower per capita cost containment.

But the bad news is the increasingly unfair distribution of health costs on individuals and families that buy insurance: they shoulder an increasingly greater burden for these costs through higher co-payments, deductibles and premiums. Even spreading the costs across an expanded population of up to 25 million newly insured if and when Healthcare.gov is operating as intended along with the subsidies many are eligible to receive, the inequitable pass-through to the insured will continue.

Health costs are tricky. Simply stated: they’re the sum of volume times price. Volume is increasing, and efforts to reduce demand through population health management and narrow networks have been spotty at best. And prices have slowed, but not as much as the Consumer Price Index overall.  Add the insurance factor: private insurers negotiate rates for employers and individuals, add at least 7% for their administrative costs, plus what they forecast for future volumes and prices, and adjust their premiums upward. Employers, in turn, increase employee co-payments, premium contributions and deductibles thus widening the disconnect between workers’ wages and costs of coverage.

Before handing out accolades for the slowdown in per capita costs, it’s important to understand the full story. And it’s time to ask the tough questions:

Is increasing access to insurance coverage the end or a means to an end? If private coverage means higher profits for insurance companies, lower disposable income for workers and unfair sharing of costs, what are the alternatives?

And should the government as a purchaser be required to pay verifiable costs based on transparent reference pricing for the goods and services it purchases? Might the mark-ups for those with private coverage be less if the government paid its fair share?

The per capita health cost increase of 1.3% last year is notable, but not the full story. For most Americans with private insurance, it means nothing, since premiums and out of pocket payments will be much higher, and their discretionary income much lower.