Health Care Inflation 101

Published November 1, 2002

On September 21, 2002 USA Today writers attempted to explain double-digit health care inflation. The news story (and I’m being generous here) was headlined: “Finger Pointers Can’t Settle On Who’s to Blame for Health Costs.”

As lead finger pointer, USA Today pointed to anything that moved, everything that smacked of free-market enterprise, and everyone connected in some manner to health care delivery and health insurance.

In fairness to the USA Today reporters, they admit they can’t settle on who is to blame. And was I relieved. I thought momentarily they were about to blame me for having a $28,000 hip replacement that threw the whole system out of sync.

What’s out of Sync?

While the media play up inflation news and the latest census report on the number of uninsured Americans, most people, including those who would report on our health care system, fail to understand how excessive government mandates and overbearing regulations on health care practitioners and health insurance companies play a major role in health care inflation.

PricewaterhouseCoopers (PwC) released a study in May 2001 projecting an overall premium increase of 13.7 percent for 2002. PwC attributes 15 percent of that increase to government mandates and regulations, 7 percent to litigation, and 5 percent to fraud and abuse. (As an aside, part of the problem is this information barely made page eight in most daily newspapers, the Wall Street Journal being the exception.)

Taken together, mandates, litigation, and abuse account for 27 percent of the increase in health care costs in this country, more than any other factor. Other lesser factors leading to health care inflation include new pharmaceuticals and medical devices (22 percent), rising hospital expenses (18 percent), general inflation (18 percent), and increased consumer demand by a growing senior citizen population (15 percent).

The PwC study also reveals how 15 percent of the current $67 billion increase in health spending during 2001 is directly attributable to laws passed by legislators.


Over the last 40 years, 1,500 unfunded insurance mandates zipped through state legislatures because politicians saw them as an easy way to garner constituents’ votes without having to raise state taxes or spend more on public health issues. Now, that massive cost-shift has come back to haunt us.

Mandates require health insurance benefits to include everything from pastoral counseling, in vitro fertilization, and sperm bank deposits to wigs for cancer patients. When combined with procedural mandates like “community rating” (insurers may not base premium cost on risk factors like life-style choices) and “guaranteed issue” (wait until you get sick to buy health insurance), these become the ingredients for an inflationary cocktail.

According to online insurance broker eHealthInsurance, guaranteed issue and community rating laws have a dramatic—and negative—effect on insurance premiums.

California has neither mandate. The average annual premium for a single policyholder in the Golden State is $1,538. By contrast, single policyholders in New York pay $3,589—more than twice as much—for their annual insurance premiums. New York imposes both community rating and guaranteed issue on policies sold in that state.

If finger pointing is still of any value, point in the direction of Congress and state legislatures. It is there we can find the critters who fuel health care inflation.

Political Snake Oil

In an effort to solve health care problems, we seem all too willing to accept the judgment of politicians as a substitute for the judgment of buyers and sellers in a free marketplace.

I, for one, would not select an insurance benefit to pay for a toupee, in vitro fertilization, sperm-bank deposits, or mental health care on parity with any physical illness. Yet I pay for them anyway because politicians have made that decision for me by passing health care mandates. The political snake-oil cure for our health care system has done little to help … and an awful lot to raise the cost of health insurance beyond the reach of an ever-growing number of citizens.

The decision to pay for insurance that covers treatment for baldness, low sperm count, or any other of many special-interest health issues should be made by individuals themselves, not by state or federal government agents.

Most actuaries, insurers, and health policy economists agree virtually all mandates increase the cost of health insurance. In addition to the PwC data, and the new eHealthInsurance study, their opinions are further supported by Congressional Budget Office (CBO) figures, which show every 1 percent rise in premium price forces 200,000 people to drop private health insurance.

While some would call the uninsured rate a national crisis and demand even more government intervention, I suggest it is a scandal and demand less of the government intervention that caused it.

The real issue isn’t that some people don’t have a health insurance policy, but rather that millions of Americans can’t afford the cost of insurance because of the mandates imposed by their representatives in government.

Conrad F. Meier is managing editor of Health Care News.