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http://www.nytimes.com/2002/10/23/business/23CARE.html

The Healthier Side of Health Care

By MILT FREUDENHEIM

ealth costs are spiraling into another year of double-digit increases. Patients, employers and government health programs are feeling the financial pain.

But where is the money going? And why do health costs continue to rise when in so many other parts of the economy — from cars to clothes to computers — prices are falling and profit margins are being squeezed?

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The big winners for now include hospitals, particularly those that have assembled networks that dominate local markets, and makers of ingenious medical devices like advanced heart pacemakers and the latest hip and knee replacements that cost more than the earlier versions. Nurses, in short supply through much of the country, are getting big raises and better working conditions.

And the strongest managed care companies — even though they long ago lost their power to check health care costs — are reporting sharply higher profits, as premiums rise even faster than do underlying costs.

By contrast, the growth of spending on drugs is slowing, after a decade-long bonanza of profits for drug companies. As health plans require members to pay a steeper share of drug costs, more consumers are turning to lower-priced generic versions of blockbuster drugs like Prozac whose patents have expired. Doctors are writing more than eight times the new prescriptions for the generic version of Prozac, fluoxetine, than for Prozac itself, according to IMS Health, a health care information company.

The pattern, in other words, is a classic one: the less competition, the higher the prices.

"Anybody that charges money and has close to a monopoly is ahead of the game," said Dr. Paul M. Ellwood, head of the Jackson Hole Group of health policy experts, which drafted an early version of the Clinton health proposal. "The losers are the patients."

Many health insurers are enjoying robust profits, passing on their costs — and then some — to employers, dropping money-losing customers and doing little to compete on price, analysts say.

Last week, the UnitedHealth Group, one of the largest managed care companies, reported a 44 percent leap in earnings per share for the three months ended Sept. 30, compared with the period a year ago. This month, Aetna, a big insurer that lost money last year, said its third-quarter profit would be twice what Wall Street was expecting.

Employers say that they are fed up with the increases, but their main response so far has been to shift more costs to workers in the form of higher deductibles, higher co-payments and a larger share of insurance premiums.

In 2003, employees will pay an average of 19 percent of total premiums for individual coverage, up from 17 percent in 2001, according to a survey of large employers released last week by Hewitt Associates, the benefits consulting firm. For family coverage, employees will pay 24 percent of premiums, up from 21 percent last year.

Employers, which typically still pay the greatest share of health costs, are putting up with the substantial increases because they know that coverage is a big item in recruiting and retaining workers, said Helen Darling, president of the Washington Business Group on Health, a group of big companies nationwide. For their part, workers are eager for more, rather than less, health care, as long as they have insurance to pay most of the bills.

More than half the increase in health spending is for hospital services. Outpatient costs are now the fastest-growing health care category, outpacing drugs, according to a study published last month on the Web site of Health Affairs, a scholarly journal.

Hospital executives say that they are just passing along their own increased costs, notably for medical technology like the latest in catheterization and for higher salaries in a nursing shortage.

On Monday, 10,200 nurses at 17 hospitals and 34 medical offices in California operated by Kaiser Permanente ratified a contract that includes wage increases of 26.5 percent over four years, expanded retiree health and pension benefits and a ban on compulsory overtime. The California Nurses Association said that hospital staff nurses with eight years of experience in the Bay Area currently earn close to $75,000 a year.

(Physicians' fees, by contrast, have been rising less than 2 percent annually, the Health Affairs study said.)

Of course, if hospitals were merely covering their costs, the earnings of some for-profit hospital chains would not be growing. Insurers and government officials say that some hospital systems have won the power to raise prices and profits by developing oligopoly-like concentrations of hospitals in markets like Houston, Long Island, Boston and San Francisco.

Another big engine of rising costs is new technology. Purchasers of health care rarely say no to a hot new product or drug that can extend or improve the quality of patients' lives, but advances generally carry premium prices.

In just over a year, for instance, sales of a new type of pacemaker that coordinates the action of both sides of the heart have hit $470 million, a figure that Glenn M. Reicin, an analyst at Morgan Stanley, projects will rise to $700 million next year.

The pacemakers are offering a new lease on life to 40,000 people in the United States with congestive heart failure. And they have contributed to a rise exceeding 15 percent this year in sales and profits at both companies that make them. Medtronic of Minneapolis has more than half the market; Guidant of Indianapolis has the rest.

Advances in cardiology have been a steady source of profits for medical device makers. Minimally invasive procedures to open clogged arteries are another case in point.

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First, in the 1970's, there were $300 balloons, inserted through an artery. But arteries often clogged up again within months, so surgeons began inserting tiny metal props called stents that cost $1,000 each to prop the artery open.

One patient in six still had serious reclogging and needed a repeat procedure. So device makers developed drug-coated stents, which tests and experience overseas have shown to be much more effective. But they cost $3,000 each.

Wall Street analysts estimate that the coated stents will add more than $3 billion next year to the nation's $1.5 trillion health care bill. Kurt Kruger, a health care technology analyst at Banc of America Securities, expects that most of the money will go to Johnson & Johnson. Last night, a Food and Drug Administration advisory panel unanimously recommended approval of the company's coated stents. Final approval is likely to come later this year.

The outlook may be less promising for makers of prescription drugs. Richard T. Evans, an analyst with Bernstein Research, said that pharmaceuticals were "no longer a growth industry." The drug makers seem unable, he said, to raise prices and reduce costs of production and sales enough to keep profits rising during fallow periods when important new drugs are scarce.

Spending on new drug research and development is less productive than formerly, Mr. Evans added, while consumer resistance to high drug prices is rising. On Monday, when President Bush offered a plan to speed the approval of lower-cost generic drugs, the stocks of most big pharmaceutical companies fell.

Like so much in the economy, of course, the prospects of health providers move in cycles.

Uwe E. Reinhardt, a health care economist at Princeton, said that insurers would probably prosper for the next two to three years before competition among them brings prices down and squeezes profits.

Hospitals may be the next target for protests by patient advocates. Although one hospital in four is in financial trouble, strong hospital groups "have the upper hand these days, so they will come in for greater scrutiny," said Mark Pauly, a health business economist at the Wharton School of the University of Pennsylvania. "People are looking around for some other bad guy."

Dr. Arnold Milstein, a health care consultant at William M. Mercer, agreed. "First it was H.M.O. executives, then pharmaceuticals that got their comeuppance," he said. "Now it's the hospitals' turn."

Some of the largest hospital operators point to other explanations for their profit gains. The Tenet Healthcare Corporation, among the nation's largest hospital chains, reported a rise in profit of 118 percent, to $338 million, in its latest quarter while revenue increased 12 percent, to $3.7 billion., It said the increase resulted from treating sicker patients and getting higher rates from H.M.O.'s and increased reimbursements from Medicare.

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ALL INFORMATION, DATA, AND MATERIAL CONTAINED, PRESENTED, OR PROVIDED HERE IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TO BE CONSTRUED AS REFLECTING THE KNOWLEDGE OR OPINIONS OF THE PUBLISHER, AND IS NOT TO BE CONSTRUED OR INTENDED AS PROVIDING MEDICAL OR LEGAL ADVICE.  THE DECISION WHETHER OR NOT TO VACCINATE IS AN IMPORTANT AND COMPLEX ISSUE AND SHOULD BE MADE BY YOU, AND YOU ALONE, IN CONSULTATION WITH YOUR HEALTH CARE PROVIDER.