The Dangers of Deflation

Submitted by on Sunday, November 2, 2014 - 03:53

In last week's issue, The Economist warned about the dangers of deflation – For an economy as a whole, deflation can be as serious a threat as inflation, and once caught in its jaws, it takes a lot of effort to reverse course. However, if it happens to a sector of an economy, especially one that has experienced hyperinflation, the results can be very beneficial. Consider then the conclusions from the recent report issued by the Health Care Cost Institute on the 2013 growth in U.S. healthcare costs. While overall costs grew by close to 4%, all that increase was simply due to higher prices, led mainly by higher pricing of hospital services. Utilization of services was down across the board and, had prices remained the same, overall health costs would have declined. Think about this. If the price of individual health care services had remained the same between 2012 and 2013, the overall cost of health care would have gone down, perhaps by as much as 3%. So why is utilization down? The answer is pretty clear: consumers are paying for services out of their own pockets and are cutting down on anything that might seem unnecessary or too expensive. Of course, we know that those decisions, simply driven by the ability to afford those services, not their underlying health value, is problematic. But we also know something else, that consumers are price sensitive.

What this means to you – the continued consolidation of providers coupled with market price opacity, has inexorably led to higher prices. In fact, we shouldn't think that it's a simple coincidence that the decrease in the utilization of health care services these past years has been accompanied by increased provider consolidation. The two are directly linked. Faced with lower use of their facilities, hospitals and health systems have been gobbling up physician practices and other providers to consolidate market share, increase bargaining power, and shift site of service for some things in order to increase the price per unit. As a result, instead of the industry experiencing deflation, we continue to experience inflation at a rate higher than the general price index. But it doesn't have to be that way. In fact, the CastLight-sponsored study provides a glimpse of how real deflation could take hold of the industry to the benefit of the rest of the economy. Given a choice, most consumers will pick the lower priced alternative. That choice, today, is restricted to medication and some discrete services. It doesn't have to be. It could be expanded to any type of episode if those providing that information were willing to take another leap, as we explained in a joint webinar with our CPR colleagues. The net result would be quite a trick….and a treat.