Health care has priced itself out of its own market

It’s no secret the U.S. economy slowed in the 2000s after the go-go decade preceding it.

But the health care system—hospitals, doctors, drug companies, device makers and health insurers—apparently didn’t get that memo.

The industry, overall, just kept raising prices—far faster than the pace at which demand for their products and services, or even the aging of the population, called for. In fact, nine out of every 10 additional dollars spent on health care in 2011 compared with 2000 were due solely to price increases.

That’s the finding of a study published last week in the Journal of the American Medical Association.

Now, health care is both heavily regulated and heavily subsidized by governments, particularly the federal government. And those regulations and subsidies make the health care “market”—which the new study describes as a misnomer—work differently than the rest of the economy. So from that perspective, it shouldn’t surprise us to see health care follow a different arc.

Still, the soaring of prices unrelated to supply (which has, on the whole, increased) or demand (which rose less than 2 percent per year on average from 2004 to 2011), shows the health care industry at large is simply detached from its customers’ real ability to pay.

“The continued increase of health care as a portion of the economy can largely be accounted to the failure of the rest of the economy to increase much at all,” wrote Dr. Hamilton Moses, the lead author of the JAMA study. Moses works at the Virginia-based Alerion Institute and the Johns Hopkins School of Medicine.

The steady price increases occurred across the board in the health care industry, Moses and his fellow researchers found. Even after adjusting for inflation that occurred economy-wide, they found that:

– Hospitals’ prices rose 4.2 percent per year, on average, from 2000 to 2011.

– Drug and device companies, which include Eli Lilly and Co., Roche Diagnostics Corp. and Cook Medical Inc., hiked prices an average of 4 percent per year in the same period.

– For doctors and other clinicians, prices rose 3.6 percent per year on average.

– Administrative services, which includes private health insurers such as WellPoint Inc., as well as government and some provider-level administration, rose 5.6 percent per year, on average.

Many of these industries are now retrenching. Lilly has laid off more than 5,500 people in the past four years, and its pharmaceutical brethren have made similar cuts.

Indiana’s three largest hospital systems have announced the elimination of roughly 900 positions this year, and smaller hospitals have quietly made similar cuts.

This study shows those painful cuts had to come, at least in part, because these health care companies failed to realize sooner that they had overshot their markets.

It's no wonder, then, that 75 percent of Americans think the U.S. health care systems needs fundamental reform, or else needs to be entirely rebuilt.