Category: Health Care Costs

Prices for Health Goods Rallying

As the economy slowly crawls its way back towards growth, inflation is well under control. However, healthcare inflation is rearing its head. Table 1 presents data from the February release of the Producer Price Index.

Over the last twelve months through January, producer prices increased by zilch, and actually decreased since last December. Prices of goods for final demand actually dropped 3.7 percent over the year. Pharmaceutical preparations, however, increased by 7.3 percent, and other healthcare goods also had higher inflation than other goods for final demand (which, I hate to state, also weakens the argument that the medical-device excise tax is having as negative an effect as the industry claims).20150219 PPI


Consumer-Driven Childbirth in the New Bronze Age

Birth rates fall during economic downturns — especially among lower-income women. A 2012 study found that birth rates declined 8% during the recession from 2007 to 2010. Presumably this was due to economic uncertainly, but could also be attributed to cost-sharing for a major medical event.

The out-of-pocket cost of having a baby is going up. High-deductible health plans (HDHPs) and their “Bronze” counterparts in Obamacare exchanges are expected to be the most common insurance arrangements for expectant mothers in the near future. A recent JAMA article  discusses the implications of high-deductible health plans and rising out-of-pocket costs on expectant mothers.

Childbirth is the most frequent reason for hospitalization in the United States. Although Obamacare mandates that insurers cover birth hospitalizations, its only limit on cost-sharing is through relatively high annual out-of-pocket maximums. According to the article:

Health Care Spending is Up, Way Up

The economic data on health spending has been bouncing around like crazy in the age of Obamacare, so we must not read too much into one report. Nevertheless, the January 30 report on Gross Domestic Product (GDP) issued by the Bureau of Economic Analysis indicates that health spending has begun to race up again, despite moderate economic growth.

Last week’s report contains the final estimate of 3rd quarter GDP and the advance estimate of 4th quarter GDP for 2014. As noted in my comment on the December release, real GDP growth in the 3rd quarter was strong: 5 percent annualized, and this was confirmed in the January report. However, growth for the 4th quarter was significantly slower, just 2.6 percent annualized.

Last Week’s GDP Estimate Included a Massive Upward Revision in Health Spending

Due to the Christmas break, we did not discuss last week’s third estimate of 3rd quarter GDP when it was released on December 23. The media noted the big headline jump in the real (inflation-adjusted) increase in GDP, from a 3.9 percent in the second estimate to 5.0 percent in the third estimate.

November’s second estimate of 3rd quarter GDP included moderate health spending growth. The third estimate blows that out of the water. Much of the upward revision to the GDP estimate was due to health spending.

The real dollar change in seasonally adjusted GDP (at annual rates) from the 2nd quarter to the 3rd quarter was estimated at $153.7 billion in the second estimate. The third estimate revised this up to $195.2 billion, a change of $41.5 billion (27 percent).

Politicians are Getting Goofy on Generic Drugs

Last month, I noted that prices for some generic drugs have been rising to great heights, inexplicably, and that politicians are trying to find out why. Well, even though we don’t quite know why, politicians are considering very harmful legislation to put a stop to it.

Scott Gottlieb, MD, has prepared a sober analysis of the causes of these price hikes. Dr. Gottlieb notes that prices of most generic drugs remain low: Only about one third of generic drugs have experience price hikes, and only a very small number have experienced very large price hikes. Like me, Dr. Gottlieb suspects that the price hikes are associated with manufacturing problems caused by lack of ingredients or regulatory interference with production. This causes the number of competitors to shrink. Dr. Gottlieb also points to recent government action that will likely increase prices of generic drugs across the board, especially a new FDA labeling rule that exposes generic drug-makers to increased tort liability.

Real Health Spending Continues Moderate Growth

The Bureau of Economic Analysis released its second estimate of 3rd quarter GDP and it confirms what was observed in the advanced estimate: Real growth in health spending is moderate.

Indeed, real GDP growth was revised upwards from 3.5 percent to 3.9 percent, but health spending was not really changed from the advanced estimate. In chained (2009) dollars, GDP grew by $153.7 billion in the 3rd quarter, but health care comprised only 8.6 billion of that growth (Table 3). If we go back before Obamacare kicked into high gear, the increase from the 3rd to 4th quarters in 2013 was $18.7 billion — more than twice as much, and both figures are seasonally adjusted.

Premiums Hiked 10 Percent for Most Popular Obamacare Plans

Consultants at Avalere have confirmed that which I previously suggested: Obamacare plans that won market share in 2014 are hiking their premiums significantly. Here’s a vignette:

In 2014, Jane enrolled in the lowest cost silver plan in her region with a $318 monthly premium. Jane earns approximately $17,500 a year (150 percent of the federal poverty level) and qualifies for a subsidy that caps her monthly premium at 4 percent of income.  Because the plan she purchased was priced below the benchmark used to calculate subsidies, Jane pays only $18 a month for insurance in 2014.

 In 2015, Jane does not go back to the exchange to re-enroll in coverage and instead is renewed automatically in her existing plan, which has a new premium of $380. While her premium has increased, Jane’s monthly subsidy will be the same as in 2014, $300. This means Jane will pay $80 a month for insurance, a nearly 400 percent increase over 2014. While Jane’s eligibility for premium tax credits will be reconciled when she files her tax returns in April 2016, Jane will experience higher monthly costs until she receives her refund.

Gilead Pays $125 Million for Priority Review Voucher

Last May, we discussed Priority Review Vouchers, a type of intellectual-property right whereby the inventor of a drug for a rare disease, which is unlikely to be profitable because very few patients suffer from it, earns a marketable voucher that it can sell to another drug-maker that it can cash in at the FDA for a priority review of another new drug.

In the previous case, Knight Pharmaceuticals figured it could sell the voucher for $125 million to $300 million. Well, the market is now proven to function. Gilead Sciences has paid Knight $125 million for the voucher.

Gilead is the firm criticized for the prices it charges for Hepatitis C drugs. It appears to be putting those revenues to good use. The NCPA believes that fundamental reforms to the FDA’s regulatory obstacles to innovation are necessary to speed up innovation and reduce the prices of drugs. Until them, the Priority Review Voucher is a valuable work-around.

Why California Hospitals Can’t Cut Capital Costs

After two major earthquakes, California’s legislature passed SB 1953 in 1994. The law imposed a mandate requiring hospitals at risk of earthquake damage to retrofit or replace their buildings. Many chose replacement. The state provided no capital grants. Twenty years later, the mandate has caused an explosion of capital expenditure dollars that are coming home now. In the San Francisco Bay Area alone, at this date, the capital costs of just 12 projects amounting to almost $10 billion are being committed that will end up being reflected in hospital prices.


Source: San Francisco Business Times, 10/31/14

Real Health Spending Remains Moderate; Inflation Increasing

For a while now, I’ve been surprised at how optimistic investors are about healthcare companies. Obamacare, the stock market tells us, is good for business. However, data on health spending does not support that story without qualification.

It looks like the discrepancy is between real versus nominal data. A survey reported in nominal dollars indicated a big hospital spending boom. On the other hand, the Gross Domestic Product (GDP) estimates indicate that real spending growth on health care is moderate.

This blog did not discuss September’s 3rd estimate of 2nd quarter GDP, which contained a significant upward revision to health spending. The Altarum Institute’s October briefing clarified that real health spending has been growing significantly faster than real GDP since the December 2007 recession. However, this is mostly because GDP dropped dramatically through the first half of 2009, while health spending did not. In absolute terms, health spending remained moderate.