HEALTH CARE COSTS
As shown by the graphic above on the left, health care costs in the United States have increased much more rapidly than in comparable OECD countries. Despite this, health outcomes (addressed later), such as life expectancy, are inferior compared to countries that spend less on health care, as illustrated by the graph on the right. The graphs below break down the difference in spending between the United States and other OECD countries.
As illustrated by the graphics above, the expenditure on health care (and hence the cost of health care) in the United States is too high, and many warn that it is unsustainable. Therefore, we need to address two main questions:
- What is driving health care costs?
- What are the major proposals to contain costs?
What is Driving Health Care Costs?
While numerous causes are thought to lead to an escalation in health care costs, some of the major factors to consider include:
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Prescription Drugs and Technology (Click to View Details)
Spending on prescription drugs and new medical technologies has been cited as the primary contributor to the increase in overall health spending. Some analysts state that the availability of more expensive, state-of-the-art drugs and technological services fuels health care spending not only because the development costs of these products must be recouped by industry but also because the decentralized system of the Health Care System in the United States does not allow for one entity to bargain reasonable prices for consumers1.
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Chronic Disease (Click to View Details)
The nature of health care in the U.S. has changed dramatically over the past century with longer life spans and greater prevalence of chronic illnesses. As a result, there are onerous demands on the health care system, particularly an increased need for treatment of ongoing illnesses and long-term care services (such as nursing homes); it is estimated that health care costs for chronic disease treatment account for over 75% of national health expenditures2.
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Aging Population (Click to View Details)
Health expenses rise with age, and as the baby boomers are now in their middle years, some say that caring for this growing population has raised costs. This trend will continue as the baby boomers will begin qualifying for Medicare in 2011 and many of the costs are shifted to the public sector. However, experts agree that aging of the population contributes minimally to the high growth rate of health care spending3.
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Administrative Costs (Click to View Details)
It is estimated that at least 7% of health care expenditures are for administrative costs (e.g. marketing, billing). This portion is much lower in the Medicare program (<2%), which is operated by the federal government, as well as other international health care systems that are single-payer systems like Medicare4. Some argue that the mixed public-private system creates overhead costs and large profits that are fueling health care spending.
What are the Major Proposals to Contain Costs?
Since the 1960s, the nation's efforts to control health care costs have not had much long-term effect, prompting a debate over what proposals are actually effective5. The various proposals are divided broadly between a stronger role for government negotiation and market-based models that rely on competitive forces. Below are the most commonly agreed upon cost-containing proposals:
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Investment in Information Technology (IT) (Click to View Details)
Greater use of technology, such as electronic medical records (EMR), has been promoted and researched for its potential to more efficiently share information and reduce overhead costs. $19 billion in federal funding has already been allocated to uniformly upgrade health IT, indicating that the movement to invest in IT has gained significant traction.
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Improving Quality and Efficiency (Click to View Details)
There are a number of initiatives that aim to improve the efficiency, quality, and cost-effectiveness of the health care system. Studies from Dartmouth have shown that there is tremendous geographic variation in health care spending, but this higher spending does not necessarily correlate with better outcomes. Some experts estimate that up to 30% of health care spending is unnecessary.
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Adjusting Provider Compensation (Click to View Details)
The current system of provider compensation pays physicians a given fee per procedure or test. Currently, there are proposals to revamp some provider payments to ensure that physician reimbursement is tied to health outcomes, rather than volume of care. This is meant to eliminate unnecessary care and thereby decrease costs. Comparative effectiveness research (CER) is being increasingly emphasized as a means to determine which treatments are most effective for given conditions, in order to provide doctors with the necessary information to make the best choices.
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Government Regulation (Click to View Details)
Many policymakers favor more government involvement in the health care sector, citing the success of the Medicare program in controlling per capita spending over its history and the failure of market-based approaches that emphasize greater individual financial responsibility. Critics argue that such regulation stifles innovation and that market-based approaches are more cost-effective. However, this has not yet been definitively proven.
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Prevention (Click to View Details)
The burden of chronic diseases, such as diabetes and cardiovascular disease, has risen dramatically. Both of these chronic conditions are very expensive to treat over long periods of time. Proposals have been put forward to emphasize prevention by providing financial incentives to workers to engage in wellness. Disease management programs have been proposed as a way to improve the treatment regimen of chronic health conditions and therefore prevent long-term complications.
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Increasing Consumer Involvement in Purchasing (Click to View Details)
Supporters of "consumer-driven" health care believe that increasing the amount that patients have to pay out-of-pocket (e.g. co-pays) would make them better consumers, thus decreasing health care usage. One of the major forms of consumer-driven health care is the “health savings account” (HSA), in which an employer contribute pre-tax funds to an account that employees can use to spend on health care. Critics of the consumer-directed approach raise concerns about the potential impacts that the higher cost-sharing would have on poorer and sicker patients.
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Altering the Tax Preference for Employer-Sponsored Insurance (Click to View Details)
Currently, employees do not pay income or payroll tax on health insurance benefits. Some current health reform proposals suggest eliminating the tax exclusion for employer-sponsored health care to help finance the costs of expanding coverage. Critics of these proposals worry that eliminating the tax exclusion could drive up the cost of health insurance to workers. They also worry that this policy would disproportionately harm smaller companies and companies that pay higher premiums because they have an older workforce.
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1 Congress of the United States, Congressional Budget Office. Technological Change and the Growth of Health Care Spending, January 2008.
2 Centers for Disease Control and Prevention. Chronic Disease Overview.
3 Orszag, P. Congressional Budget Office Testimony: Growth in Health Care Costs. Delivered before the Committee on the Budget, United States Senate, January 31, 2008.
4 Kaiser Family Foundation, Medicare Chart Book, 2005.
5 Altman, D. and L. Levitt. February 23, 2003. The Sad History of Health Care Cost Containment As Told in One Chart. Health Affairs Web Exclusive
Acknowledgements: Originally prepared by Jane An, Romy Saloner, Rebecca Tisdale, and Usha Ranji of the Kaiser Family Foundation
