Industry disruption may finally impact “It’s the pricing” conundrum

August 3, 2018 / By Katie Christensen

One of the most enlightening insights from a recent University of Washington research study is that pricing contributes to ever-escalating healthcare costs. Since 2003, the annual rate of growth of healthcare spending has averaged 4.5 percent, which is more than two and half times the average rate of inflation over that same period (1.9 percent).

The study, published in the Journal of the American Medical Association (JAMA), explores the role of pricing in relation to an aging baby-boomer population, overall population growth, as well as service utilization and disease prevalence. Researchers from the University of Washington’s Institute for Health Metrics and Evaluation seek to explain the $933 billion increase in healthcare spending from 1996 to 2013.

Interestingly, service utilization and disease prevalence together explain only two percent of the increase. Given that it has been a long journey to reduce inpatient utilization and address medical necessity on short length of stay discharges, this is a welcome finding.

Most compelling was the study’s analysis that pricing was responsible for 50 percent of the increase in costs. Specifically, diabetic patients were identified as the single largest cohort with pricing variation, primarily for pharmaceuticals. Separately and not surprisingly, an aging population was a strong influence on rising prices, along with an increase in the overall population. 

So, if pricing is a major factor in rising healthcare costs… now what?                     

First, keep in mind this is not a new phenomenon. Many of us remember a widely publicized article “It’s the prices, stupid from 2003.  Much of economic theory says that healthcare pricing is influenced by true competition, minimum barriers to entry and accessibility. These factors, however, often don’t pertain to our local healthcare ecosystem.

…To understand the changing landscape of healthcare and where we might find opportunity to affect pricing, perhaps we need to consider what is taking shape both within and outside the healthcare marketplace.

In the past six months we have seen two large healthcare merger deals turned down by the federal courts (Anthem/Cigna and Aetna/Humana) as well as the announcement of two strategic partnerships (Amazon/Berkshire/JPMorgan and CVS/Aetna). Larger entities may have opportunity to drive pricing while our economic system is based on free enterprise and minimizing barriers to entry.

…and as costs increase, money is being left on the table, representing an untapped market and undelivered healthcare.

Increasingly, industry leaders must address issues facing members with high-deductible plans where the cost impact is either cash out of pocket or choosing to go without care. It is estimated that nearly eight percent of members do not fill prescriptions due to cost considerations.

… but can we reasonably expect changes in prices in the short term?

It is not surprising that change often does not come from within. How can we engage healthcare stakeholders in changing what is known, familiar and entrenched in current business processes and systems? We can look to other market sectors as examples of the how to successfully respond to disruption and manage change.

At the end of the day, increasing consumer awareness of pricing, escalating costs and an aging baby-boomer population are just some of the pressing forces leading us to a new healthcare ecosystem with different players. Who will be around during this journey of disruption? Those entities (investors, providers, insurance plans) able to look through the prism of change and see opportunity.

Katie Christensen is a healthcare consulting manager within the Population and Payment Solutions group of 3M Health Information Systems.