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Opinion: Addressing the soaring cost of medical care

Insured Californians usually see the bill for their monthly healthcare premium or the amount deducted from their paycheck to pay for medical insurance. However, they rarely see the $6,500 bill for just the cost of the hospital room where they stayed, or the $2,500 for the colonoscopy or even the $150 a month for their allergy medication.

Yet, these are the numbers that really matter in determining the price for medical insurance premiums because the costs of health care – the hospital, doctors, prescription drugs and other medical bills – make up, on average, 87 percent of the premium price. And those costs are rising faster than inflation.

For instance, the price of a colonoscopy – a test physicians say we should have after age 50 – has tripled in the last three years. The average price of hospital care in California increased nearly 40 percent in five years. And national spending on prescription drugs has more than doubled in the past decade.

With the Assembly and Senate health committees set to examine these rising costs at a hearing on Tuesday, it is important to understand California health insurance premiums, which essentially serve as a funnel.

Payments to hospitals and physicians, medicine, medical equipment, lab and test fees, care coordination, disease management programs, claims processing and many other costs pour into the top of the funnel. All of those costs blend together and out of the bottom comes one dollar figure – your health insurance premium.

As the cost of the ingredients going into the top of the funnel increases, health insurance gets more expensive.

Not all ingredients are equal. As it should be, medical costs account for the lion’s share of the premium dollar: 87 cents.  Ten cents are spent on health plan advice nurses, chronic care, disease management, prevention programs, health information technology, administration and three cents go toward profits.

While health plan administrative costs decreased steadily over the past decade, other medical costs have spiked. The federal government reported that, in 2009, hospital, doctor and drug costs, along with a declining economy, led to the largest growth in healthcare spending since the government began tracking this data 50 years ago. Medical costs are increasing across the board – from routine office visits to appendectomies.

Prices on medical devices and testing are significant. A CT abdominal scan, for example, can cost anywhere between $750 and $1,600. And physicians are using these types of tests more than ever. The number of CT scans performed in emergency rooms across the country increased five-fold, from 2.7 million to 16.2 million, between 1995 and 2007.

In addition, the number of people using medical services is on the rise. As the baby boomer generation ages, the need for healthcare grows.

Hospitals are a major component of the healthcare spending equation. Hospitals experience the same challenges as physicians in terms of rising costs, but also face increased emergency room usage. The only healthcare option for many uninsured low-income residents is to use hospital emergency rooms. Hospitals aren’t compensated for medical services provided to the uninsured and are underpaid for treating patients on government health care programs.

The only way they can make up for those losses is to charge the insured higher prices.  This drives up the cost of private insurance by about $1,100 a year for a family. And when patients visit an emergency room for non-urgent conditions, it costs more than four times the cost of a retail clinic for the same procedure or treatment.

As the cost of providing services increases, so do insurance premiums.  The only way to shrink the impact on consumers is to bring down the rising cost of medical services. 

Health plans are doing their part to lower costs and will continue to do so. The plans are working to minimize administrative costs, for example, streamlining paperwork requirements with doctors’ offices. Health plans also offer critical initiatives to help improve the health of members and lower costs. For instance, health plans offer chronic disease management to help people manage or improve conditions, such as diabetes.

The entire healthcare industry – physicians, hospitals, pharmaceutical companies, medical device companies and health plans – need to work with policymakers to decrease the cost of care. We need to advance evidence-based medicine, promote preventative care, increase efficiency in healthcare administration, reduce medical errors and work to eliminate unnecessary testing and treatments.

With healthcare costs rising so rapidly, the conversation needs to begin with the prices charged long before Californians receive their premium bills or see the deduction for health insurance on their paycheck. Change must focus on the underlying cost of hospitalization, doctors’ care, prescription drugs and all the other ingredients that make up 87 cents out of every $1 in premium prices.


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