An insurer’s perspective on healthcare costs

Jonathan Blum of CareFirst BlueCross BlueShield gave a great talk on delivery system transformation at the Leonard Davis Institute today. As someone that has worked for the Center for Medicare and Medicaid Services (CMS) on cost-control initiatives and now does similar work for a commercial insurer, he had a unique perspective on optimal strategies for curbing the rise in healthcare spending.

Unsurprisingly, he pointed out that brand name medications are a major driver of rising costs for health insurers (and thus a major driver of rising premiums). For both personal and legal reasons, insurers have a hard time saying no when physicians and patients push for expensive treatments.

Drug companies know this and so they have a extremely strong negotiating position when choosing a price for their therapy. They rightly predict that individual consumers, pressured by glossy advertisements, will demand their expensive medications; insurers will be unable to say no for an extended period of time; and when these costs push up premiums for everyone, this consequence will be so dissociated from its cause that it will lose emotional salience to the general public.

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The cost of innovation in healthcare

Healthcare spending has been growing at an unsustainable rate.

In 2014, we spent $9,523 per person on healthcare which is up from $4,878 per person in 2000 and $2,854 per person in 1990.1 This growth has dramatically outpaced inflation and now accounts for 17.5% of GDP.2

This translates to rising insurance premiums, deductibles, and medical debt which in turn increase financial pressure on families that are already struggling to get by.3 A recent poll by the New York Times and the Kaiser Family Foundation found that one in five people with health insurance has had problems paying their medical bills requiring them to use up their savings, sell assets, and borrow money at high interest rates.4 For those without insurance, half had similar struggles.

A major driver of these increasing costs is technological innovation which accounts for between 30% and 50% of healthcare cost growth.5 As Nicholas Bagley, Amitabh Chandra, and Austin Frakt explain in a discussion paper written for the Brookings Institute, there are few countervailing forces against endlessly rising prices in medical treatments.6

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