With ‘Enhanced Market Power,’ Hospitals Increase Costs for Insurers; Prescription Drugs, New Technology Also Factors

Increased payments to hospitals, technology and rising prescription drug costs have increased medical costs 10% to 15% for the "biggest" insurance companies in the first quarter, the New York Times reports. The cost increases are being fueled, the Times reports, by the "enhanced market power" of hospitals, which are "demand[ing]" higher payments from insurers. Rising prescription drug costs and advances in surgery, diagnostic techniques and medical devices are also increasing costs for insurers. The Times reports that as costs are rising, insurers are "dropping" many of their "gatekeeping measures" that "kept ... costs in check." For example, many insurers have stopped reviewing doctors' orders, and no longer use a capitation payment system. The rising costs are translated into higher premiums for employers. Peter Lee, president of the Pacific Business Group on Health, an employers' group that negotiates rates with health plans, said, "Employers in general have lost faith in managed care as it was five years ago." He added that managed care "no longer rings true with large employers." Patients also must pay higher health costs. The Times reports that the Public Employees Retirement System in California is requiring patients to pay more for office visits and "for the first time" is charging a copay for prescription drugs. "[S]ome economists" say that "the growing unhappiness could stoke popular demand for political solutions, and even revive interest in a single-payer health system." Uwe Reinhardt, an economist with Princeton University said, "In 1991 and 1992, the last time a business slowdown coincided with double digit inflation in health costs, people started to talk about universal health coverage" (Freudenheim, New York Times, 5/25).