What Causes the Costs of Health Care to Rise?

In 2010 $2.6 trillion was spent on health care in the United States; roughly equaling 18 percent of the gross domestic product (GDP) of the country. Over the last 30 years the percentage of GDP devoted to health care doubled and by 2021 the Centers for Medicare and Medicaid Services (CMS) estimates that health care spending will reach $5 trillion per year or 20 percent of GDP. What is causing this rise?  What factors lead to these seemingly constant increases?

The Bipartisan Policy Center, (BPC) which was formed in 2007 and is headed up by former Senators Howard Baker, Tom Daschle, Bob Dole and George Mitchell looked into what drives up health care costs. The BPC found that an aging population, improved care for chronic medical conditions, a health care system that determines reimbursement on volume instead of on coordination of care, the use of physicians’ time,  the use of defensive medicine, and the consolidation and competition in health care are the main factors driving up health care costs.

Aging and Chronic Conditions

The Congressional Budget Office  has determined that over the next 25 years the increase in the elderly population will be responsible for 52 percent of the growth in spending in federal health programs. Medicare enrollment is expected to increase by 1.6 million each year with a total of nearly 81 million beneficiaries by 2030. This aging will increase health care spending growth overall by 0.5 percentage points each year.  This growth is a result of not only the increased number of individuals becoming old, but increased longevity due to advances in treatment of diseases such as cardiac conditions and diseases related to smoking.

Individuals with chronic disease utilize a high volume of complex health care services. Nearly 84 percent of all health care dollars and 99 percent of all Medicare expenditures are attributable to individuals with chronic conditions, according to a Robert Wood Johnson Foundation study. A 2012 study by the Center for Disease Control noted that many of these chronic conditions are preventable and are often accelerated by the choice to engage in unhealthy behavior.

Volume of Treatment

In 2008, 78 percent of all care was reimbursed under a fee-for-service (FFS) reimbursement scheme, according to a Bureau of Labor Statistics Report. The FFS method of reimbursement provides a strong incentive to have a high volume of tests and services performed, according to the BPC.  The economic incentives are particularly high for services with high fixed costs, such as imaging services.

Fragmentation in the delivery of health care services also increases volume, according to the BPC.  When providers are paid on the basis of  volume rather than for taking responsibility for the episode of patient care, there is little incentive to coordinate with other providers to deliver care efficiently. Lack of care coordination costs the United States between $158 billion and $226 billion annually, according to the BPC report.  Thirty-two percent of adults and 42 percent of primary care physicians believed they or their patients were receiving too much care, the BPC reported.

Use of Physician’s Time

The number of specialist in the United States continues to grow. Between 1965 and 1992 the ratio of specialty physicians  to the U.S. population grew by 120 percent. Research suggest that more specialists lead to higher costs. The BPC refered to studies that have shown that  health care spending is high in regions of the country with a larger proportion of specialist.

Allied professionals, such as nurse practitioners and physician assistants, are not performing up to their fullest extent and training. Licensure limitations and supervision requirements result in physicians spending time, at a higher cost, doing functions that could be performed by these professionals the BPC found.

High volumes of paperwork and other administrative burdens can and should be reduced, according to the BPC. Taking care of these functions consume a signficant amount of time. Paperwork and administrative burdens are estimated to be between $156 and $183 billion a year by the Institute of Medicine.

Defensive Medicine

In 2003, in a survey of high-risk specialists, 93 percent reported utilization of additional diagnostic procedures, tests, and imaging service due to concerns over growing malpractice costs.  A survey of physicians in Massachusetts found that 83 percent of physicians reported practicing defensive medicine.

Competition and Consolidation

The lack of competition and the increase in consolidation can lead to an increase in costs. The health care market often times does not allow for individuals to shop for services and procedures among providers on the basis of cost.  Provider consolidations such as hospitals merging into larger systems or directly employing physicians can encourage waste and reduce efficiency.  For example, the price of a coronary angioplasty was 25 percent higher and total knee replacement costs  were 19 percent higher in concentrated markets, the BPC reported.   It is estimated that hospital consolidation raised prices by at least 5 percent.

All of these and other factors are providing opportunities to reduce waste, deliver more effective, coordinated care, and improve the health and well-being of all Americans, the BPC concluded.  No one single driver is responsible for high and rising health care costs. The drivers of health care costs are complex and multi-faceted.