What Drives Up Health Care Costs?

Health care costs in the United States have risen from $1,100 per person per year in 1980 to nearly $7,900 today.¹ Medical advances during this time deliver value, but not commensurate with the rising costs that push health insurance rates beyond the reach of too many of us.² Claiming one in every six cents Americans spend ($2.3 trillion), out-of-control health care costs threaten our entire economy.³

So why do costs continue to rise? Experts⁴ have identified the following top 10 cost drivers:

1. "It's covered"

Few realize that the drug they paid a $30 co-payment on costs hundreds, or that physician office visit are primarily paid by insurance coverage—most patients pay only a small portion of the actual charge.⁵ As medical cost inflation continues to rise higher than consumers' co-payments and deductibles, employers are picking up the bulk of premium costs—keeping wages flat and making the consumer less aware of total costs.⁶

2. Personal Habits—Our individual choices increase the cost of coverage for everyone

• Tobacco and second-hand smoke kill 450,000 people in the U.S. annually and sicken millions, costing $96 billion in health care and $97 billion in lost productivity.⁷
• Obesity and complications (heart disease, diabetes, cancer) cost an estimated $117 billion a year, and drove 27 percent of the per-capita health spending growth from 1987 to 2001.⁸
• Chronic diseases—often preventable—take 75 cents of each health care dollar.⁹

3. High Rate of Use—More care is not better care

According to Dartmouth College's Institute for Health Policy and Clinical Practice, the U.S. spends $500 billion dollars annually on unnecessary medical care. In fact, studies have shown that patients have at least a 43 percent chance of undergoing an unnecessary medical test at their next physician visit.¹⁰

Hearts, hips and knees are routinely replaced. Cancer survivors number in the millions. Medical advances offer many life-enhancing and life-saving benefits—at a cost.

More costs more. The U.S. has one-third more CT scanners and 2.5 times as many MRIs per person than the average in developed countries. While an x-ray machine costs about $175,000, a CT scanner costs $1 million and MRI machines up to $3 million.¹¹ We get MRIs when an x-ray would do, possibly injuring health.¹²

5. Defensive Medicine—Poorly coordinated care

Defensive medicine occurs when medical providers order unnecessary tests out of fear of being sued for misdiagnosis. Medical tests aren't cheap. Some estimates indicate that defensive medicine costs the health care system more than $100 billion per year.¹³
Team that with a fragmented, poorly coordinated care system that treats one symptom at a time (and 125 million Americans with at least one chronic condition)—health care suffers and costs increase.¹⁴

6. Cost-Shifting

When Medicare/Medicaid pass costs to the private market by not paying the same rates, market rates rise. According to a study by Kaiser Family Foundation, shifting Medicare/Medicaid costs to private payers adds a "hidden tax" of $1,788 to insure a family of four.¹⁵

7. Prescription Drugs

Prescription medications can prevent and treat illness, improve quality of life and are the fastest-growing component of health care, thanks to biologic medications made from living organisms. These powerful medications are expected to drive usage 30-fold between 2005 and 2013. Biologics already cost between $1,000 and $3,000 per month today.¹⁶

8. Mandates / Regulations

Federal and state governments have placed thousands of mandates on the health care industry dictating what they must cover and how to process medical claims. Mandates increase administrative overhead and force up the cost of health insurance.¹⁷

9. Hospital and Facility Duplication

Hospitals have traditionally provided most surgical procedures to patients. However, a new phenomenon has transformed the landscape of these services.

Doctors are building an increasing number of outpatient facilities that provide income-producing surgical services to patients that require less overhead. As these facilities are built, physicians are guiding patients to them, decreasing the number of income-producing procedures sent to hospitals.

This leaves hospitals with more of the more costly emergency room business, and fewer profitable procedures. As hospitals lose revenue, the cost of services provided to other patients must increase.¹⁸

10. The Uninsured / Underinsured

Treating uninsured individuals costs approximately $164 billion each year. That figure is paid primarily by taxpayers and private entities.¹⁹ With so much invested, it's important to understand the facts behind the numbers:

• 67 percent have private insurance and the Centers for Medicare and Medicaid Services says by adding government insurance, the total of those who have coverage, or are eligible for government programs, totals 95 percent.²⁰
• More than eight in 10 uninsured Americans live in families where the head of the family works.²¹

Solutions

Consumers, health care practitioners, business and government can work together to create a health care system that is economically sustainable, costs less, encourages health and leads to better outcomes.

• What the health care industry can do: Four Key Actions for creating an affordable and sustainable health care system
• What consumers can do: Six Ways to Get Involved