Where does healthcare inflation end?

Although the German hyperinflation of the 1920s has faded from the memory of all but historians and economists, it might be worth revisiting given the inflation that continues in the U.S. healthcare sector.

Of course the inflation in Germany, which forced the Weimar Republic to print 50 trillion mark notes, is not on the same plane as the healthcare inflation here. But there are some similarities, such an an economic system disconnected from real-world events that tends to drive up prices much higher than warranted.

That's why, for example, a visit to a hospital emergency room can cost a patient in some circumstances tens of thousands of dollars, or a single pill can cost $10, or a bag of saline $100. During an era of historically low consumer inflation, hospital prices in many cities have risen by double digits in recent years.

The German hyperinflation began because instead of initially paying in real-world goods, it decided to print currency to buy foreign currency elsewhere to pay war reparations, (France and England only wanted payments in non-German currency or gold).

Healthcare's relative hyperinflation began here because there has never been much of a real-world connection to health and well-being and our culture as a whole. There is certainly compassion on an individual level, but our 19th century love of Emersonian self-reliance never evolved as our technologies and medicine have. If you had cancer in 1848, your fate was pretty much the same if you were rich or poor, so both had little choice but to be stoic. That's changed, but our attitudes toward an individual's fate have not.

That's allowed us to consider healthcare a commodity for a large swath of America rather than a right. Our patchwork of healthcare payer mechanisms tends to follow along. Medicare, which is based on an absolute (that the aging should have access to healthcare as a reward for a lifetime of hard work), pays fairly reasonable prices for the services rendered. Medicaid, which is also based on an absolute (that the poor shouldn't die in the streets but they shouldn't be coddled either), pays far less.

Healthcare would be far less inflation prone were it not for the third payer patch, the commercial realm. Commercial payers are among the nation's largest and most profitable enterprises, and they are almost all publicly traded. Their absolute is self-interest, translating to a desire to spend as little as possible for the highest return to shareholders.

That's truly the inflationary pressure point for hospitals. They are being leaned on to take less from the commercial insurers, so they continuously raise their chargemaster prices to support their arguments during payer negotiations. If they can no longer justify doing so, hospitals merge with another partner, which gives them better bargaining power. But the elimination of competition serves to raise prices as well.

Consumers catch the spillover. If the health plans can't get what they want from the hospitals, they cost-shift over to individual policyholders. That's why most households even with employer-based coverage are paying five figures for their healthcare these days, and why it looks like the state health exchanges will see double-digit premium increases in 2016. And that's also why the uninsured are usually presented with hospital bills at the full chargemaster price.

The pharmaceutical industry plays a lesser role in the inflationary spiral, but their presence is still significant, and consumers are also the pressure point. Pharma companies are for-profit and publicly-traded. Their management and shareholders have come to the realization that developing drugs that hold the prolonging of life over a patient's head can reap enormous profits. That's why there are $1,000 pills to treat hepatitis C, and why many other old-line medications have seen their prices soar in recent years; patients have no choice but to pay up. The industry has also lobbied Congress to eliminate any practices that might cut prices, which distorts the market even further. That's why you can spend tens of thousands of dollars on a car built in Germany, Japan or Korea that might prove a better value than the American counterparts, but not even a penny on a less expensive statin capsule that comes from there.

The German hyperinflation ended after 20 months when it introduced a new currency backed by gold and discarded the old currency. In essence, the only way that would be accomplished in the United States is to convert the entire country to a single-payer system, either through the expansion of the existing Medicare program, or by converting the commercial plans to the role of government contractors with reasonable cost escalators.

Neither of those things are going to happen -- yet. The German government acted because of fear of civil unrest (rioting in Munich toward the end of the hyperinflation foreshadowed a vastly darker chapter in history).

As I said before, the inflationary spirals in healthcare are no match for what happened in the Weimar Republic. But give it another decade or two to continue to scale up, and keep on making consumers pay up with little say in the matter, and anything is possible. -- Ron (@FierceHealth)

Related Articles:
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NYT uncovers huge markups for saline bags 
Massachusetts hospitals that charge more get more revenue

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