Here's a surprising factoid: The Bureau of Labor Statistics says that in the past 12 months, the price of medical care has risen only 4% -- and that's down from roughly 5% jumps in 2001 and 2002. But try telling the average hard-pressed American that medical-care inflation is modest and falling. Kaiser Family Foundation says private employer-sponsored health-insurance premiums rose 13.9% this year, the most since 1989.
Can both numbers be correct? Yes -- and here's why. First, people are using more medical care these days. So even though prices of individual items such as magnetic resonance imaging (MRI) aren't rising rapidly, the total bill is. Second, insurers have raised rates faster than costs to boost margins.
Cost-saving technology, combined with competition, is a big reason that medical-care prices have risen just 4%. Laser eye surgery, for example, has plummeted from thousands of dollars to a few hundred dollars per eye. The rise of generic drugs has also helped. In 2002, the first full year that Prozac was off-patent, the average price of antidepressants rose less than 2%. Those factors are reflected in the government's inflation measure, which simply compares price changes for a set list of items.
Unfortunately, the modest increase in per-item charges has been swamped by the public's rising consumption of medical care. More services -- as opposed to higher prices -- explains close to half of the jump in medical spending this year, says the Center for Studying Health System Change, a Washington think tank.
Why are Americans using more medicine and medical services? There are several reasons. Many employer-sponsored health insurers now allow participants to see specialists without preauthorization, which has boosted usage. Doctors are providing more treatment to improve care -- and their bottom lines. The availability of new drugs, such as cholesterol-lowering statins, has sent the number of prescriptions soaring. Plus, people are switching to more costly items, such as Johnson & Johnson (JNJ ) drug-coated stents for angioplasty. They're better than ordinary stents, but they cost three times more. The government misses those effects in the Consumer Price Index because it doesn't pick up changes in usage volume or the mix of what's consumed.
Health insurers, meanwhile, are intent on rebuilding their profits, which collapsed after a price war in the late 1990s. But even they are surprised by how much money they're making. Aetna Inc. (AET ), for example, says it overestimated the increase in costs it would face this year. The company, which raised premiums 13% to 14%, says its costs went up only about 8% in the first half of the year. So Aetna now anticipates full-year operating profit margins of 8%, up from an expected 6%.
Health insurers are likely to raise their premiums a bit less next year, but the hike will still be in the double digits, experts say. And with consumer usage increasing, medical spending is likely to run ahead of measured medical-care inflation for years.
By Peter Coy in New York