What is driving the cost of health care?

0513 Data Graph 05Cost shifting‚ an aging population and new technologies are pushing health costs ever higher. State and federal health care reforms seek to reverse the upward spiral.

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Health care costs in Oregon have been rising at a much higher rate than other sectors of the economy for much the same reasons they have been increasing in the rest of the country. A dysfunctional system of coverage shifts costs from growing legions of uninsured to private-insurance patients; an aging population boosts demand for services; and our insatiable demand for new technologies and drugs is an expensive habit. Oregon is ahead of the curve when it comes to implementing new requirements of the Affordable Care Act, with provisions intended to counter some of these factors. But in the short term, reforms may lead to still higher prices for care, as vested interests — employers, insurers, providers, the government and patients — continue to disagree about the best way to bring down costs.

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Cost shifting

Since uninsured patients can’t afford to see a doctor or partake of preventive treatments, they typically end up in costly emergency rooms for their primary care. According to the Oregon Association of Hospitals & Health Systems (OAHHS), the state’s annual number of emergency room visits rose 5% between 2007 and 2011, and outpatient visits rose 15%. Inpatient days — when a doctor has ordered a patient to be admitted — fell 3%, with fewer inpatient admissions and shorter lengths of stays. With 320 ER visits per 1,000 people in 2010, Oregon fared better than 42 other states, but, unfortunately, many of these visits are on the house.

When hospitals deem a patient unable to pay, they provide “charity care,” which ballooned nearly 600% in the decade ending in 2011. “Bad debt,” hospital bills that patients refuse to pay, rose almost 150% in the same period. Together charity care and bad debt comprise what hospitals call “uncompensated care.” In Oregon’s urban areas, uncompensated care approached 8% of gross charges after the last recession — it neared 9% in Oregon’s rural hospitals — before improving in 2011.

To make up for these losses, hospitals can’t look to government programs. Medicare pays just 81 cents, and Medicaid 86 cents, for each “dollar spent caring for beneficiaries,” OAHHS claims. So ultimately, hospitals must balance budgets by “cost shifting” losses and deficits to the bills of private-insurance patients. In the end, lowering hospital bills will require tackling enormous twin challenges of bad debt and charity care.

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Aging population

Let’s face it: We’re getting old. In 2011, 14.3% of Oregonians were 65 years of age and older, up from 12.8% in 2001, according to the Census Bureau. This ranked Oregon 15th among the 50 states, higher than the U.S. overall at 13.3%. Percentages are much higher in southern and coastal areas that have attracted many retirees. For example, Josephine and Curry counties had 23.0% and 28.3%, respectively, of residents 65 and older. And as baby boomers continue to age into this demographic it will continue to swell.

This population creates a strong demand for health care. Most of its services are paid for by Medicare, which the OAHHS shows surpassed private insurance within the last few years to become the biggest patient revenue source at more than 40%, though Medicare beneficiaries represent only 17% of Oregon’s 2011 population, and the state ranked 46th for per capita Medicare billings at $13,752. Oregon also had the lowest nursing facility occupancy rate in the nation in 2010, according to the Kaiser Family Foundation.

As the state and nation get grayer, they’ll need more medical facilities and workers. Health care jobs have already outstripped the private sector overall, growing 64% in the last 20 years. The sector likewise grew from 6.3% of the state’s gross domestic product in 2006 to 6.9% in 2009. This requires huge investment in infrastructure and human capital, yet does not make products for export or generate new income. Instead it often bankrupts sick residents, devours government subsidies and hobbles the state with a population that consumes services but does not produce taxable income. Getting old is no fun.

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New technologies

The U.S. is renowned for health care innovation, and new medications, devices and techniques have revolutionized standard practices many times over in the last quarter century. However, newfangled technologies have a price. Portland-based HemCon Medical Technologies, for example, developed a novel type of bandage formulated using the substance chitosan, derived from shrimp, which rapidly stops bleeding on the battlefield and beyond. The fact that HemCon became Oregon’s biggest corporate bankruptcy of 2012 after being sued for patent infringement illustrates that stakes are high in health care technology. Companies spend many years developing products, investing millions, awaiting FDA approval and fending off litigation. So if and when brand-name drugs or medical devices finally hit the market, prices must be inflated way above manufacturing costs to cover all the R&D, marketing and intellectual property fees before patents run out or the technology becomes obsolete.

These demands fuel medical inflation. In 2012, Portland-Salem’s consumer price index (CPI) for medical care was 262 points above CPI for all other items, and it has greatly surpassed U.S. medical care CPI since 2007. Prescription drugs are one of the fastest growing among medical care CPI components, and Oregonians have been heavier-than-average drug consumers. In 2011, Oregonians per capita filled 13.3 retail prescription drugs at pharmacies, versus 12.1 across the county, according to the Kaiser Family Foundation.

Health care companies will continue to face battles bringing products to market, and it’s unlikely patients’ hunger for better drugs and technologies will be sated anytime soon. But if consumers can become more cognizant of the costs of their care — even as an employer or insurance company foots the bill — they might aid its cost-effectiveness.

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The Affordable Care Act gets underway in earnest starting next January, and Oregon is leaping ahead of most states to comply. The federal government granted the state $226 million to set up Cover Oregon, a health insurance exchange that will initially serve only the individual and small group markets. It intends to enable small companies to offer employees various levels of choice to shop for the plan they prefer. Cover Oregon will coordinate payment of premiums between the employer and the mix of plans selected. In April the Obama administration announced that states could delay the rollout of small-employer exchanges until 2015, but Oregon’s exchange will be implemented as planned next year, according to Lisa Morawski, Cover Oregon’s communications manager.

Oregon has also moved swiftly to approve 15 coordinated care organizations (CCOs) to serve Oregon Health Plan and Healthy Kids plan members in 90% of the state. CCOs are networks of doctors, therapists, dentists and other professionals who have banded together to ensure local at-risk patients get effective treatment for chronic illnesses, receive preventative care and avoid the emergency room.

Although CCOs are designed to reduce costs, other ACA provisions could initially raise prices in the individual insurance market. That’s because the law will remove pre-existing conditions as a reason for denying coverage and mandate expansion of benefits, such as covering prescription drugs, and mental health services, and providing preventive care without a copay or deductible. Premiums for older plan members must be no more than three times those of younger members, lowering costs for the old but probably raising them for the young. Federal premium tax credits will offset some of the cost increases.

Even as state and national reforms move forward, it’s impossible to say whether these changes will meet their dual goals of delivering quality care to everyone while controlling costs. More than most states, Oregon is on a path to do just that. But for now, cost shifting, expensive technologies and the demands of an aging population continue to place an untenable burden on the state’s health care system.

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Brandon Sawyer is research editor for Oregon Business. You may reach him at [email protected].