What is driving up costs?

See Dave Flanagan's (I) view of what is driving up health care costs in his policy paper, Affordable Health Care Now:

Maine Can't Wait for Affordable Quality Healthcare

Healthcare costs in Maine are out of control. That's what I've heard from people all over Maine. From the single mom working in a Sanford manufacturing plant who told me there's no way she can afford to pay for health insurance for her family, yet she earns just too much to be covered by Medicaid. To the janitor in Scarborough with three jobs – one just to pay his healthcare premiums. To the business manager in the St. John Valley concerned about providing adequate coverage for his employees. Maine people are worried about how they will pay for healthcare in the future. And rightfully so.

This year we will spend an estimated $5.5 billion on healthcare. That's up from $4.7 billion in 1999.¹ Relentless increases far higher than the rate of inflation are undermining our family budgets, our competitive position, and our government finances. The time has come for Maine to act. With input from doctors, consumers, business managers, hospital administrators, insurers, academics and other concerned citizens, I have developed a comprehensive strategy to make healthcare more affordable for Mainers. Most importantly, I'm setting a goal of holding the rate of health insurance premium increases below 10% in 2003 and beyond – Maine families and the businesses that employ them cannot afford one more year of 20 or 30% inflation. No other candidate in this race is offering such a specific goal – or the tactical steps we have to take – in order to achieve the objective of more affordable healthcare for Maine families

Maine's healthcare system is in crisis. Stunning premium increases for employer-sponsored plans are eroding the paychecks of families and eating into the competitiveness of our businesses. Similar increases for state, local and school system employees are driving up taxes and college tuitions. These spiraling costs should not surprise us. Maine has neither a State plan for healthcare, nor the discipline of a competitive market, nor a regulatory system with meaningful controls on expenditures. It's a prescription for cost overruns that will eventually rob us of healthcare access and quality, jobs and businesses, and the funding needed for other government services.

With a more affordable healthcare system, we can begin to realize real economic and social gains for Maine families. We can improve access and quality for disadvantaged Mainers, and make real progress in health insurance coverage for the working poor – too many of whom lack an adequate level of protection against the financial ravages an illness can inflict on a family.

This healthcare crisis has been a long time coming, as Medicaid spending, prescription drug costs, insurance costs, medical supply costs, investments in new technology and healthcare facilities, eroding competition, and other factors have combined to form a "perfect storm" of uncontrolled costs. Maine has spent at least seven years studying the problem – the Maine Health Care Reform Commission in 1995, the Year 2000 Blue Ribbon Commission on Health Care and now the Health Care System and Health Security Board study ordered by the legislature in 2001. These studies have produced reams of valuable information – some of which I've used to create this plan. Now the time has come to move beyond studies to actions that will start bringing healthcare costs under control.

Health care costs are a complex problem because there is no single cause for their rapid explosion. And when analyzing these costs, it is important to remember that the price tag includes many benefits to society and to the quality of individual lives. The principal causes for health care inflation can be identified, as follows:

	Rising costs of prescription drugs, medical supplies, and new technologies,
	Rising provider costs due to decreasing competition and investments in new facilities,
	General inflation,
	Increased demand for services resulting from our aging population and little or no direct incentive for insured consumers to worry about the cost of treatments, procedures or drugs,
	Litigation,
	Fraud and abuse,
	Inadequate numbers of trained health care professionals, and
	Maine's rural and sprawling population requiring more medical facilities to ensure reasonable access.

A recent study by PriceWaterhouseCoopers analyzed the forces driving healthcare cost increases and found that increased consumer demand, drugs, medical devices, and other medical advances are behind nearly half the increases on the national level. The other half is driven largely by litigation, mandates, and rising provider expenses. The study points out that for some of the drivers, such as drugs and medical advances, current spending may be offset by future savings in reduced other medical services.⁷

An earlier assessment was made by Dr. Samuel R. Nussbaum, on behalf of Anthem/Blue Cross at the EGGS n' ISSUES breakfast, March 8th, 2002 in Portland. It represents the view of one of the largest insurance companies in the U.S. and draws upon their national statistical data base. Based on their data, the Health of Mainers is very good, but the cost of care is high and the rate of reimbursement by Government insurers is very low.

One of the more interesting observations about the rising cost of health care is the paradoxical one of the relationship of comprehensive employer or government paid health care and the lack of, for want of a better term, consumerism. This means that when someone else is paying the bill, a person is far more likely to order the 'most expensive item on the menu', less likely to shop around, and less likely to ask critical questions. The provider is more likely to order more services and care options. Canada is realizing that the very nature of their MEDICARE system has produced a generation of users who don't care about the costs; and this is one of the driving reasons behind mixed systems with individual co-pays.

This is an excerpt from a technical report done in 1998 by HCFA:

In a normally functioning competitive market, a decline in the prices that purchasers are willing to pay for a given service can be expected to result in a decrease in the quantity of such services that suppliers would be willing to furnish, and thus a decline in overall expenditures on these services. The reaction to reductions in Medicare physician fees has generally not followed this pattern. Rather, reduced fees are likely to be met by a combination of an increase in volume and a shift in the mix or intensity of services furnished to Medicare beneficiaries. (this is what is called a paradoxical, or reverse effect).

There are at least three key characteristics of the market for medical services which tend to encourage this response. First, patients often have very little information about the nature of care which they require. Second, patients (including Medicare beneficiaries) directly bear very little of the cost of services furnished, and thus have little incentive to monitor costs or question the necessity of services. Third, uncertainties in the practice of medicine allow for alternative practice styles within and across areas (e.g., two nearby cities may have very different rates of coronary artery bypass surgery). As a result, physician practice modes vary widely