Are Medical Providers Jacking Up Prices Just Because They Can?

A massive new database reveals that hospitals and other providers are to blame for recent increases in healthcare spending.

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One of the big explanations behind the alarming rise in healthcare spending is that America's fee-for-service system of payment encourages doctors to order lots of expensive procedures, even if they do nothing to help patients. Because fee-for-service emphasizes quantity over quality of care, it tends to lead to the overuse of medical services. And that extra consumption naturally drives up spending on healthcare.

But some new data suggest that overuse, though problematic, isn't the catch-all bogeyman many think it is. In fact, the prices of the services themselves are increasing. According to a massive database of five billion health insurance claims put together by the Healthcare Cost Institute, medical prices increased three times faster than the rate of inflation between 2009 and 2010. Even as healthcare usage dipped somewhat on account of the recession, hospital prices in particular jumped by 5.1 percent. Prices for outpatient visits grew more than 10 percent. General inflation over the same period? That rose just 1.6 percent by comparison.

That raises a question: how are healthcare providers able to jack up their prices this way and still get away with it?

To grasp the issue one way, consider prostate cancer screenings. In a long-awaited announcement yesterday, a federal task force recommended against being screened for prostate-specific antigen (PSA), the blood protein that's linked to prostate cancer. PSA tests are practically worthless, the task force argued. They can't tell you how serious a tumor is -- only that you might have one. As a result, many more men get treated for prostate cancer than is probably necessary. And since treatment carries serious side effects -- people have been known to die from it, if they didn't become incontinent or impotent -- the screenings may be doing society more harm than good.

If the screenings don't help, why has it taken so long for the task force to come out against it? Well, one reason may be because some insist the tests really do help. Our emotional tendency to think that more healthcare leads to better healthcare could be another. But Otis Brawley, the chief medical officer at the American Cancer Society, has a different theory: mass screenings are popular because they're a cash cow.

In an op-ed yesterday for, Brawley recounts a conversation he had with a hospital's marketing executive. The exec was bragging about how he'd managed to take a free (free!) cancer screening event and use it to turn a buck:

The marketer had figured out how many men would be treated with surgery, radiation, and hormones. He had estimates of all the money the center would make from treating all 45 cancer cases. He knew how many men would be treated for urinary incontinence, and what his net profit for treating that would be. Amazingly, he even knew how many of the men would want penile prostheses surgically implanted to treat their impotence.

In other words, Brawley's saying that medical providers have an incentive to keep the PSA test around because not only do they make money from treating the cancer -- they also stand to gain from treating the side effects later. And if a million men who didn't need any of that treatment to begin with decide they want those services anyway? So much the better.

The fight over prostate cancer screenings offers a rare glimpse into the surprising relationship among healthcare providers, patients, and insurance companies. We usually think of insurers as the major villain in American healthcare, since much of the debate in the last few years has revolved around expanding coverage and ending discrimination. But it's also the case that healthcare providers wield an inordinate amount of power.

In some cases, the providers become so powerful they can push the insurance companies around. That story was famously told in an epic two-part production of This American Life back in 2009. Due to its domination of the San Francisco Bay area, one hospital network managed to force Blue Cross of California to raise insurance premiums for all its customers in the region. Although Blue Cross was able to slow the rate of increase in a negotiated settlement with the hospital, the incident did far more to highlight the hospital's power to manipulate prices against everyone else's will.

Which brings us back to the HCCI report. News outlets spent much of Monday reporting that medical providers, not overuse, were to blame for recent increases in healthcare spending. But why those providers found it so easy to jack up their rates is another question. The answer appears to be that nobody's around to stop them.