Confront Healthcare Inflation or Die: A Broad View of Healthcare Reform

This past Sunday, the Projo ran a contrarian Froma Harrop column, where she questioned the conventional healthcare reform wisdom that a focus on preventative care will lower costs in the long run…

The word “prevention” has a nice ring in any health-care discussion. Thus, many politicians argue that programs to stop smoking, improve diets and otherwise promote wholesome living save money in the long run. A healthier population at less cost. Sounds like a win-win situation.

Unfortunately, that formulation is a pleasant fantasy…

Let’s put it bluntly: Longer lives cost money. Those who make it to 90 thanks to exercise and six daily servings of vegetables are more likely to suffer the expensive ravages of old age. Everyone dies of something. So he who avoids a fatal heart attack at 70 is more at risk of cancer at 80. Those extra 10 years can mean extra CT scans, hip replacements and physical therapy, even for those in relative good health.

There is fodder for many important discussions here, but for now, I want to focus on just one aspect -- the costs of those extra CT scans.

Later in her op-ed, Harrop makes reference to the exorbitant rate of medical inflation…

Rapidly rising prices for health-care also add to the expense of moving big-ticket medical procedures into later years, explains [Arthur Garson Jr., provost at the University of Virginia Medical School]. “In today’s world, where the rate of medical-care inflation is twice the rate of regular inflation, anything done 10 years from now is, in real dollars, 25 percent more expensive.”

There are two ways to deal with that problem, according to Garson. Get medical costs down, and “keep people as healthy as possible as long as possible so that they don’t spend as much money being sick.”

But why should hyper-inflation in healthcare prices, for decades at a time, be accepted as some unalterable force of nature? As technologies mature, why shouldn't the costs of producing and using medical hardware come down in exactly the same way that hardware costs in other economic sectors do; for example, think of cell phones or printers, which were once expensive luxury items, but are now affordable to nearly everyone. And then consider the CT-scans. A medical facility that has recently purchased CT equipment should be able to charge a lower price to each patient while paying off the costs of the equipment off just as quickly if they can treat 100 more of Froma Harrop's longer-living people per year than they would have if people were dying off more quickly. Why aren't these kinds of effects bringing the rate of healthcare inflation down to reasonable levels?

It is not possible to improve the combination of healthcare quality and access in the U.S. without grappling with the economic irrationality of continuing, runaway medical inflation. If policy makers involved in healthcare reform ignore the inflation question, declaring it to be some kind of iron law of modern society, the "best" they are going to be able to come up with is -- by definition -- a permanent regimen of forcing people to pay more for less, aka a program of rationing.

Of course, to do the right and effective thing, healthcare policy makers are going to have to confront the problems that have been created by poorly thought out government interference with individual medical choices. Health and Human Services Secretary Michael Leavitt wrote about a particularly egregious example earlier this month in the Wall Street Journal…

For years, the Government Accountability Office and the Department of Health and Human Services' inspector general have been saying Medicare is paying too much for Durable Medical Equipment (DME). Just compare what Medicare pays to the prices of equipment for sale on the Internet.

DME prices are based on a fee-schedule established by law in the 1980s and subsequently updated for inflation. But the fee-schedules weren't based on competitively determined market prices. It is a price-fixing program, and the equipment suppliers like it because they get overpaid and don't have to compete.

An oxygen concentrator, for example, is a device that delivers oxygen through a tube to patients, and it costs about $600 on the open market. Medicare beneficiaries typically rent the machines. The rental period, set by statute, is up to 36 months. The monthly rental payment, also set by statute, is $198.40. So renting an oxygen concentrator for 36 months costs $7,142.

As with most items and services in Medicare Part B, beneficiaries pay 20% of the costs, and Medicare pays the remaining 80%. The government, therefore, pays $5,714 – almost 10 times the free-market price of purchasing a concentrator outright. The patient pays $1,428 – more than twice the free-market price of purchase. Even allowing for the costs of setting up equipment, training and fitting the beneficiary, and other things, the rental fee is way out of line.

Do you think this is the only case where the cost of medical hardware has been grossly inflated by strange government priorities, or just the worst?