Dobson DaVanzo, a leading consulting firm, has produced a report for the Federation of American Hospitals, the trade association for for-profit hospitals. The report notes that the rate of change of health spending has slowed down. Indeed, the report concludes that spending is set to shrink this year by over one percent. This introduces a “paradox”:
However, paradoxically, consumers perceive that their health care spending is increasing more than usual. This perception is largely a result of spending on their health care increasing faster than personal income combined with a continuing redesign of their health insurance benefits, which shifts more of the cost burden onto consumers:
- Almost 60% of Americans think that health care costs have been growing faster than usual in recent years, and more than 70% of consumers attribute responsibility for their perceived high and rising costs to health insurance companies.
- Total premiums have increased substantially over the past decade, from 14.9% to 21.6% of median household income between 2003 and 2012.
- Employee contributions to premiums and out-of-pocket spending have risen 23% faster than employee costs since 2009 (32% in cumulative growth vs. 26%) (See Exhibit 2).
We think this “paradox” is explained by consumers gradually becoming free of the money illusion that someone else (usually, the employer) is paying for their health care. This is a desired result of consumer-driven health care. One of the problems for hospitals is that consumers with high-deductible health plans get admitted and are unwilling to pay their out-of-pocket share of the hospital charges. One Congressman told me that one third of the uncompensated care provided by the largest hospital in his district was accounted for by insured patients.
This is a problem for hospitals, but should we care? No and yes. To the degree hospitals’ financial problems are caused by their buying up physicians’ practices so that they can charge higher fees for the same services, we should ignore their pleas. However, many inpatient procedures are truly catastrophic situations, rare and insured. In these cases, patients should not be faced with deductibles that are high for them but a small share of the charge. This requires significant reforms to the design of health insurance that are not possible under traditional health insurance, which levies co-pays and deductibles based on twelve-month enrollment periods instead of incidents of disease or accidents. Hospitals (and pharmaceutical companies and medical-device makers, too) should get onboard the movement to re-design health insurance along these lines.