The Top Driver of Premiums? The Cost of Health Care Services.

To make health care coverage more affordable, the nation must address the soaring cost of medical care that continues to increase at an unsustainable rate. The simple truth is premiums track the underlying cost of care. In fact, a data brief from the National Institute of Health Care Management Foundation found that “97 percent of the rise in premium spending between 2006 and 2010 was due to growth in insurers’ spending for health care services for their enrollees.”

There needs to be a much greater focus on the main drivers of medical cost growth: soaring prices for medical services, new costly prescription drugs and medical technologies, and the impact of provider consolidation.

Increased Medical Spending

As health care costs increase, so do premiums. In the fourth quarter of 2013, health care spending rose at its fastest pace in 10 years. This increase was driven by an $8 billion rise in hospital revenue — more than the previous four quarters combined.

According to the latest report from the Altarum Institute, prices continue to rise with year-over-year growth in hospital and prescription drug prices from 2013 – 2014.

Prescription Drugs

Specialty drugs, which include medications typically used to treat complex conditions, are generally priced higher than traditional drugs. In 2013 alone, U.S. spending on prescription drugs totaled more than $260 billion — 25 percent of which was spent on specialty drugs. A recent report estimates that spending on specialty medications is expected to more than quadruple by 2020. One recently introduced drug, Sovaldi, has been heralded as the “canary in the coal mine of drug policy” – a clear harbinger of a public health crisis.

These rising costs put a financial burden on patients. They are forced to pay for these prescription drug cost increases either through higher premiums, out-of-pocket costs, or a combination of the two.

Provider Consolidation

When hospitals or provider groups consolidate, by merging with other hospitals or buying physician practices, health care costs go up. As the New York Times put it today, “Larger organizations have greater market power to demand higher prices from those plans for doctor visits and hospital stays. And higher prices paid by plans translate into higher premiums for consumers.”Research shows that consumers may face price increases of 20-40 percent for health care services following a hospital or provider merger.

In an article in the February 2010 edition of Health Affairs, Paul Ginsburg and Robert Berenson  stated that “providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned.”

For more on the factors impacting premiums, visit Time for Affordability.

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