Healthcare Costs Continue to Rise, But Why?

It’s no surprise that Americans spend a huge amount of money on healthcare each year. High insurance premiums, high deductibles, copays and other out-of-pocket expenses are just some of the challenges Americans face today.

One reason for rising healthcare costs is government policy. Since the inception of Medicare and Medicaid (programs that help people without health insurance) providers have been able to increase prices on their other insured population patients to make up for their expense shortfalls. Skeptics would point out that this not only allowed for revenue cost-shifting, but has now created a huge opportunity to drive tremendous profit into their practice or health system.

While we could certainly write extensively on the dangers of the aforementioned issues, which is now only getting worse with the entrance of Private Equity and Venture Capital firms into the provider space, let’s focus on the clinical reasons why the costs continue to escalate.

Healthcare costs have risen drastically in the U.S. over the past several decades. According to a March 2019 study published in the Journal of the American Medical Association (JAMA), healthcare spending in the U.S. rose nearly a trillion dollars between 1996 and 2015.

The study reported that healthcare spending in the U.S. during 2017 was $3.5 trillion, or about $11,000 per person. By 2027, these costs are expected to climb to $6 trillion – roughly $17,000 per person.

Where does that money go? According to the JAMA study, spending can be broken down into 11 categories:

  • Hospital care (32.7%)
  • Physician services (15.6%)
  • Other personal health care costs (15.1%)
  • Prescription drugs (9.5%)
  • The net cost of health insurance (6.6%)
  • Nursing care facilities (4.8%)
  • Investment spending (4.8%)
  • Clinical services (4.3%)
  • Home healthcare (2.8%)
  • Government public health activities (2.5%)
  • Government administration (1.3%)

The JAMA study investigated how five key factors were associated with healthcare increases over time:

  1. Population growth
  2. Population aging
  3. Disease prevalence or incidence
  4. Medical service utilization
  5. Service price and intensity

The authors found that service price and intensity, including the rising cost of prescription drugs, made up more than 50% of the increase. Other factors, which comprised the rest of the cost increase, varied by type of care and health condition.

Growing and Aging Population

Healthcare gets more expensive when the population expands—as people get older and live longer. Therefore, it’s not surprising that 50% of the increase in healthcare spending comes from increased costs for services, especially inpatient hospital care. Nor is it a shock that the two next highest factors when it comes to increased healthcare spending are population growth (23%) and population aging (12%).

Increase in Chronic Illnesses

The authors of the JAMA study point to diabetes as the medical condition responsible for the greatest increase in spending over the study period. The increased cost of diabetes medications alone was responsible for $44.4 billion of the $64.4 billion increase in costs to treat that disease.

After diabetes, conditions with the greatest increase in costs were:

  • Low-back and neck pain: $57.2 billion
  • High blood pressure: $46.6 billion
  • High cholesterol: $41.9 billion
  • Depression: $30.8 billion
  • Urinary disease: $30.2 billion
  • Osteoarthritis: $29.9 billion
  • Bloodstream infection: $26 billion
  • Falls: $26 billion
  • Oral disease: $25.3 billion

Increased Ambulatory Costs

Ambulatory care, including outpatient hospital services and emergency room care, increased the most of all treatment categories studied. Outpatient costs rose from an annual cost of $381.5 billion to $706.4 billion. Emergency department costs across all health conditions rose 6.4% over the same time period.

Rising Health Insurance Premiums

For most people, the rising cost of health insurance premiums lies at the center of concerns about rising healthcare costs. According to the National Conference of State Legislatures (NCSL), the average annual premium for family healthcare coverage rose nearly 5% in 2018 to $19,616.

The average increase in premium costs in 2018 for people on a private plan or a healthcare exchange was $201. The two most-cited reasons for these increases were government policy and lifestyle changes.

Government programs like Medicare and Medicaid have increased overall demand for medical services—resulting in higher prices. Also, increases in the incidence of chronic conditions like diabetes and heart disease have had a direct impact on increases in the cost of medical care. Chronic diseases constitute 90% of health care costs, and more than half of all Americans have a chronic illness.

Demand for medical services has increased because of Medicare and Medicaid, resulting in higher prices.

Higher Out-of-Pocket Costs

Higher insurance premiums are only part of the picture. Americans are paying more "out-of-pocket" than ever before. A shift to high deductible health plans (HDHPs) that impose out-of-pocket expense limits of up to $16,400 per family has added greatly to the cost of healthcare. In fact, between 2006 and 2016, out-of-pocket costs for Americans with employer-sponsored health coverage rose faster than the costs that their insurers paid.

Inefficiency and Lack of Transparency

Thanks to a lack of transparency and underlying inefficiency, it’s difficult to know the actual cost of healthcare. Most people know the cost of care is going up, but with few details and complicated medical bills, it’s not easy to know what you’re paying for.

The Wall Street Journal reported about one hospital that discovered it was charging more than $50,000 for a knee-replacement surgery that only cost between $7,300 and $10,550. If hospitals don’t know the true cost of a procedure, patients may have difficulty shopping around.

When it comes to overall transparency, a New England Journal of Medicine (NEJM) survey showed that only about 17% of care professionals believed their institutions had either “mature” or “very mature” transparency.

Patients Avoiding Care

Rising costs have created another casualty: People who skip medical care altogether. They do so not because they are afraid of doctors, but because they’re afraid of the medical bills that come with it.

A poll by the West Health Institute and NORC at the University of Chicago revealed that 44% of Americans refused to go to a doctor due to cost concerns. About 40% of those surveyed said they skipped a test or treatment for the same reason. In many cases, those who refuse treatment have medical insurance.

The Bottom Line

Each of the factors mentioned here contribute to rising healthcare costs. Increasing costs for medical services caused by both a growing and aging population play a large role.

But, so do other factors such as the growing number of people with chronic disease, increased costs for outpatient and emergency room care, higher premiums, and higher out-of-pocket costs. These factors are exacerbated by inefficiency and lack of transparency in the world of medicine.

Potential solutions include employer-sponsored population health and wellness programs (especially those that target chronic illness), increased reliance on medical technology to remove inefficiencies, and attempts to achieve greater transparency to help lower costs. For individuals, the primary way to reduce costs is to maintain a healthy lifestyle, eat well, get plenty of activity, and stay up-to-date with your recommended health checkups and screenings.

Written by Cameron Troxell, Vice President of Benefits Strategy. Feel free to drop him a note or reach out on LinkedIn.