Aggregate Demand Dominance: HCE

In my previous posting, I attempted to knock down one of conservative economics’ sacred cows; today I’m aiming at the crown jewel of conservative canards: personal responsibility. Simply put, market forces don’t care about how responsible individuals are.

Health Care Expenditures

Health Insurance premiums have been relentlessly escalating for 15 years:

2013 EHBS 1.11 2013 EHBS 1.13 Average Annual Premiums for Single and Family Coverage, 1999-2013

No real surprise there. By 2006, the insurance premium explosion was so horrendous this was passed off as a positive development:

HMO Rate Increases Continue to Decline for Fourth Consecutive Year, According to Hewitt Associates; U.S. Employers Remain Focused on Managing Costs

Not every publication could respond to Hewitt’s press release with the Business Wire’s bubbly optimism:

HMO rate increases decline to a mere 11.7 percent

HMO Rate Increases Continue to Decline for Fourth Consecutive Year, According to Hewitt Associates U.S. Employers Remain Focused on Managing Costs
Hewitt Associates LLC
Press Release
June 13, 2006

Preliminary information from Hewitt Associates, a global human resources services company, shows that 2007 HMO rates will increase approximately 11.7 percent — representing the fourth consecutive year of declining rate increases.

“Although there has been a steady decline in the level of HMO rate increases over the past several years, double-digit increases are still very difficult for employers to absorb,” said Paul Harris, senior health care strategist, Hewitt Associates. “The good news is that there do not appear to be market pressures that might cause rates to begin increasing again.”

Well, no rate increases other than the 11.7% rate increase Hewitt had just announced. Some physicians were not impressed:


By Don McCanne, M.D.

This is good news? Rates are stabilizing at low double digit increases? Employers are managing costs by sharing more of the costs with employees?

These rate increases are well in excess of inflation, and costs are being shifted to employees at a time when their wages are failing to keep up with the rest of the economy. Patients are bearing much of the brunt of our failed health care funding policies.

It’s not that we don’t understand how to control health care costs. We do. The single payer model does precisely that (with the not insignificant additional advantage that it also provides truly comprehensive coverage for absolutely everyone).

Single payer uses the combined market power of millions of American patients to demand prices in line with what this nation can afford. This begs a question—why aren’t insurance companies doing this? Why are private insurance companies singularly unable to control health care costs? If premium increases continue to outstrip inflation, single-payer is inevitable; at the tipping point either the insurance industry goes bankrupt or the economy goes down the tubes permanently. It is almost as if the insurance industry is willing to drive itself out of business. Strangely, it is a problem the industry faced once before…and conquered.

Health Care Enigma

The 1990s were not dominated by premium explosions:

For the first time in 10 years, HMO premiums fell in 1995, signaling that managed care may finally fulfill its promise of lowering health care costs.

That’s the finding of Foster Higgins’ annual survey of employee benefits, which found a second consecutive year of big market-share gains for managed-care plans.

The national survey found a 2.1 percent rise in the overall cost of health care premiums, to $3,821 per employee. Yet HMO premiums dropped 3.8 percent, to $3,255.

Last year, the cost of health plans fell 1.1 percent, the first time in the survey’s 10 years that prices fell.

Smaller employers saw the greatest decreases in HMO premiums, with an 11.9 percent reduction. That market is particularly price-competitive, with small employers willing to jump plans every year to get the lowest premiums.

That trend continued the following year:

HMO Premiums Decline 2nd Year in a Row; Hospital Days Down in Number and Cost

Premiums dropped 0.7 per cent last year across the land, a survey of 466 HMOs shows. The annual report by the consulting firm Milliman & Robertson indicates that over the year beginning July 1, 1995, the weighted average premiumweighted average premium for HMO enrollees declined from $150.72 to $149.67 a month.

Co-author David Ogden said the survey indicates that “The increased penetration of HMO managed care programs has brought us to the point where health care inflation will be much closer to the rate of general inflation for the foreseeable future than it has been.”

It was the second year in a row that premiums fell.

While the weighted average premium declined, the average premium (per HMO, rather than per member) rose slightly. Ogden attributed that to the probable ability of large HMOs to drive harder bargains with providers and to do a better job of controlling hospital inpatient days than small HMOs can do.

Overall, inpatient days per 1,000 members fell dramatically (13.8 percent) to 237. Inpatient per diem costs fell 1.1 percent, to $1,230.

HMO premiums seem like a good place to start; considering managed care exerted its market muscle two decades ago, centered on limiting hospital admittances:

TABLE 1: Annual Change Per Capita in Health Care Spending and Gross Domestic Product, 1994-2003
  Spending on Type of Health Care Service  
Year All Services Hospital Inpatient Hospital Outpatient Physician Prescription Drugs Gross Domestic
Product (GDP)
1994 2.1% -2.0% 8.7% 1.7% 5.2% 4.9%
1995 2.2 -3.5 7.9 1.9 10.6 3.4
1996 2.0 -4.4 7.7 1.6 11.0 4.4
1997 3.3 -5.3 9.5 3.4 11.5 5.0
1998 5.3 -0.2 7.5 4.7 14.1 4.1
1999 7.1 1.6 10.2 5.0 18.4 4.8
2000 7.8 4.1 9.8 6.3 14.5 4.8
2001 10.0 8.7 14.6 6.7 13.8 1.8
2002 9.5 8.4 12.9 6.5 13.2 2.7
2003 7.4 6.5 11.0 5.1 9.1 3.8
Notes: GDP is in nominal dollars. Estimates may differ from past reports due to data revisions by Milliman USA and the Bureau of Economic Analysis.

Sources: Health care spending data are the Milliman USA Health Cost Index ($0 deductible); GDP is from the U.S. Department of Commerce, Bureau of Economic Analysis

The changeover occurred after 1998, and the reason why seems apparent:

Figure 1

HMOs began a decade-and-a-half-long slide, and their primary adversary, hospitals, began raising their rates to eye-popping levels. Perhaps this was a backlash against the very real rationing that HMOs engage in, but the more likely culprit was the 2001 recession. Some businesses reduced insurance options or shed health coverage entirely…

2013 EHBS 2.1

…that reduction clustered amongst smaller employers:

2013 EHBS 2.2  Percentage of Firms Offering Health Benefits, by Firm Size, 1999-2013

2004 is a curious year in the unfolding saga. Insurance-offered rates plummeted after hospital prices began their early-2000s climb, never really recovering. Obamacare isn’t to blame, unless U.S. legislation has developed the ability to time travel. So what caused the crash?

Health Care Enragement

Medicare Part D; specifically the authorization in the 2003 legislation to create High Deductible Health Plans (HDHP). They couple with Health Savings Accounts (HSA), the tax-deferred carrot to the massive stick that encompasses both high deductibles and obscene out-of-pocket-maximums that should include bankruptcy forms attached should the patient be involved in a major accident. Essentially, the plans are catastrophic health coverage minus the protection against financial catastrophe.

Naturally, HDHP has become all the rage since they took the market by storm starting in 2006:

Exhibit E

However, these odes the “personal responsibility” have ducked any responsibility for insurance premiums nearly doubling in a decade:

Exhibit A

Why the wild popularity? Well, there is the fact that HDHP are minutely less expensive than other plans:

Exhibit B

Making preventative care free will not solve the expense problem—hospital chargemasters will not respond to such irrelevance. The insurance industry cannot win at their own game versus pharmaceutical companies, let alone consolidating hospital conglomerates:

When the Evanston Northwestern Healthcare Corporation merged its two hospitals with the neighboring Highland Park Hospital just north of Chicago 13 years ago, the deal was presented as an opportunity to increase efficiency and improve the quality of patient care.

But when the Federal Trade Commission finally decided to look at the deal, it encountered an entirely different objective: to gain market power.

Mark Neaman, Evanston’s chief executive, had told his board that the deal would “increase our leverage, limited as it might be,” the investigation found, and “help our negotiating posture” with managed care organizations.

The commission caught Ronald Spaeth, the Highland Park C.E.O., talking about the corporation’s three hospitals and explaining how “it would be real tough for any of the Fortune 40 companies in this area whose C.E.O.’s either use this place or that place to walk from Evanston, Highland Park, Glenbrook and 1,700 of their doctors.”

It was a great deal for the hospitals. The fees they charged to insurers soared. One insurer, UniCare, said it had to accept a jump of 7 to 30 percent for its health maintenance organizations and 80 percent for its preferred provider organizations.

Aetna said it swallowed price increases of 45 to 47 percent over a three-year period. “There probably would have been a walkaway point with the two independently,” testified Robert Mendonsa, an Aetna general manager for sales and network contracting. “But with the two together, that was a different conversation.”

And who was left holding the bag? Not the shareholders of UniCare or Aetna. It was the people who bought their policies, who either paid higher premiums directly or whose wages grew more slowly to compensate for the rising cost of their company health plans.

Forty-five percent price increases from the consolidation of three hospitals. For reference, Aetna is a HMO provider (and a poorly ranked one at that). It clearly is no longer the 1990s—HMOs cannot reverse this departure from market reality. HMO plans have lost so much market-setting power that Point Of Service (POS) plans, a “HMO/PPO hybrid,” are slightly less expensive.

But it gets much worse (economically speaking–shitty HMOs getting their comeuppance is just rich). PPO providers negotiating with two hospitals in Evanston and another in Highland Park, IL swallowed 80 percent price increases. There is no mention of Blue Cross Blue Shield in the NY Times piece, but it bears mentioning that this Chicago, IL-based insurance conglomerate represents over 105 million Americans. Yet three suburban hospitals run rings around insurance companies that include a behemoth that represents one-third of the American population.

I have to call it—private insurance has passed the point of no return. Insurance companies needed to be much more than Groupon writ large. They failed singularly at that task, and when private health insurance industry circles the drain, the United States of America will have to revisit health care reform. God help us all.


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