Health Care – costs vs. price

It’s oft repeated that health care costs continue to rise at a crazy pace.  While most costs of most products and services have been decreasing, in terms of “real”, inflation-adjusted dollars, health care, like education, have been increasing at record paces.  And, unlike the housing/real estate “bubble”, there doesn’t seem to be an end in sight.  What’s going on?

Most commentators talk about health care cost increases.  However, the evidence I see suggests something different.  Yes, we’re seeing health care price increases.  But cost increases? There’s a difference.

Caveat: I am not a professional economist.  I’m one of those infamous ABDs – All But Dissertation.  Finished all my PhD courses, passed my comprehensive exams, got my dissertation subject approved and committee formed, etc., but then business opportunities and disenchantment with the academic profession took me down another path.  My observations here are anecdotal; I’ll let me economist friends get into the more detailed facts and stats.

An industry with rapidly increasing costs exhibits widely different behavior that what we’re seeing in health care (higher education too, for that matter).  Firms in high cost environments are struggling to stay alive, raising prices only reluctantly to keep up with costs, being squeezed by the costs around them.  Capital expenditures are delayed, or addressed shabbily.  When capital money is spent, it is usually on cost improvement or efficiency projects, not expansion projects.  Corporate boards force austerity measures on upper management. Firms look toward lower cost environments.  Instead of locating offices in shiny office towers, you’ll find the administration located in warehouses, or going offshore. Etc., etc.

Industries facing increasing cost environments are typically “mature” industries, where their product has been commoditized, little room for innovation, plenty of uniform competition.  Price increases become difficult, as consumers can always buy at the next, cheaper, homogeneous producer; the company finds itself squeezed every time it sees increases in the costs of its inputs and supplies.  Companies making coat hangers, electrical wiring, and other commodities are such examples.

What do we, though, see in the health care industry?  Lot’s of shining towers, gold-plated board rooms, huge growth – that’s what I see.  I live just a mile and a half from the famed Texas Medical Center.  It has been growing at a crazy pace in the last 10 years I have lived here, gobbling up my former residence, the beloved Parkwood Apartments, filling in former parking lots with more buildings, and now even encroaching within a half mile of my house, buying up a former strip shopping center.  Construction cranes still dominate the TMC skyline to this day.  Is this a center struggling to keep with costs??

One interesting example: when Baylor University couldn’t come to terms with Methodist Hospital about becoming a joint teaching hospital (like the UT/Hermann Hospital arrangement), they said, “okay, we’ll build our own hospital”, tearing down the 50+ year old Parkwood Apartments.  It wasn’t an issue of not having enough room within Methodist, or overcrowded rooms, opatients overflowing into the hallways, or too much demand, it’s just that they couldn’t come to terms with their potential party.  And they had enough money to walk away from the partnership without consequence.

Then, we can talk about Big Pharm.  One of my long-term friends was enticed to move to New Jersey several years ago, with the promise of a 6-figure salary (first time for him), working as an environmental consultant for a big pharmaceutical firm.  He quit after a year?  “Why?”, I asked him.  His response: couldn’t stand the ethics of the pharmaceutical industry.  He described the lavish offices, the super-large expense accounts, the constant “entertainment” the companies would lavish on their potential customers – that is, doctors.  This is not an industry bitten by high costs, but one that is able to drive high prices, allowing them to afford all this lavishness.

This is symptomatic of an industry where customers are willing and able to pay for such high prices.  We see it with vacation resorts, high dollar clothing, jewelry, etc., where the customers have the money and are spending it.

What, you say?  I can barely afford health care now – how am I driving up prices??  Well, You’re not – in many cases, you are not the consumer.  The New Yorker ran recently ran a piece on rising health care costs, by examining the one of the highest Medicare cost per capital county in the nation, Hidalgo County, TX.  It is also has the  lowest household income in the nation – that is, it is very poor.  The author was looking for answers as to why, invoking cultural reasons (aggressively entrepreneurial Hispanics, lack of leadership-oriented “anchor tenants”, etc.), all of which  are very interesting.  But, as I read through the 8 page article, I couldn’t help but asking: “author, aren’t you seeing the connection between poorest county and highest cost?”  That is, it seemed obvious to me, that because Hidalgo County was the poorest in the nation, its citizens weren’t the real health care consumers – Medicare was.  And, Medicare, as a consumer, doesn’t really check up on things.  Sure, it puts a cap on prices paid for specific procedures, but it doesn’t really evaluate just how many procedures are necessary for a patient.  As a result, as the author documented, there’s a proliferation of procedures, a tendency toward procedure escalation too: choosing the higher-price, easier procedure over perhaps the prudent one.  With Medicare as the consumer, there’s really no control.

And that’s the way it is with you too.  You’re consume health care services, for sure, but the real “consumer” is Medicare and insurance companies.  (an aside insurance, like banking, securities, etc., is one of the most highly regulated industries in this country). And who are insurance companies biggest consumers?  Why, big corporations, of course.

Because of tax incentives, in a very bizarre twist of history, companies have become the biggest providers of health insurance to individuals.  It’s really kind of strange, finding yourself beholden to a employer because of its “benefits”.  In an otherwise individualist nation, we’ve come to expect corporations to provide health insurance, instead of us employees negotiating higher pay and paying for health insurance ourselves –  perhaps joining co-ops, mutual benefit societies, professional groups, neighborhood associations, etc. to get group rates.  As a nation that has supposedly become more “progressive” over the last century, this adulation of the corporation is weird.

But, look at the real result of corporate-oriented (oh, I shouldn’t forget unions also) health insurance policies: they’re more likely to be gold-plated, benefiting the decision-makers within corporations, that is upper-management, while of course passing some crumbs onto the rank-and-file.  So, we’ve got gold-plated, luxury health insurance plan dollars and Medicare dollars chasing our health care expenses.  No wonder it’s a high price, not high cost, environment.

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I'm the founder of Agoric Source, co-organizer of the Houston Python Meetup, director of technology at Newspaper Subscription Services, LP, technology advisor to InstaFuel, active board member of the Houston Area Model United Nations, and occasional volunteer to the Red Cross (during hurricanes or other local emergencies). I'm first and foremost still a software hacker, but with my economics background and business experience, I serve well as a project or program manager, technical visionary, etc.