The Top 4 Factors Driving Up Health Care Costs: An In-Depth Examination

No one can deny that health care costs have been steadily increasing over the past 50 years. Some of this has been inevitable, as the population has increased and more sophisticated technologies and drugs have extended life and halted the spread of many destructive diseases. But today the cost of health care in America has become a monster gobbling up providers and patients alike. And it’s only going to get worse. Luckily, many political organizations are finally sitting up and taking notice of this problem.

A report released in September of this year from the Bipartisan Policy Center (BPC) looked at some key factors causing the steady increase in health care costs. This paper is a first step in establishing a Health Care Cost Containment Initiative, a program intended to evaluate available strategies for containing the steadily increasing cost of health care in the United States.

The Cost of Health Care Today

In 2010, the US spent approximately 18 percent ($2.6 trillion) of our national GDP (Gross Domestic Product) on health care services. This represents a significantly higher health care cost than other advanced nations, such as the United Kingdom, Germany, and Japan. These increasing costs are affecting both private citizens and the government; Medicare and Medicaid in particular have seen sharp increases in cost over the last few years and are due to increase as more baby boomers reach the age of 65. Without direct and concerted action, the cost of health care in America will become unsustainable in the next 20 years.

Why this Increasing Cost Must Be Addressed Now

The cost of health care has dropped in recent years, but is about to pick up speed.

The three factors that make up the cost of our national health care are medical prices, population, and the use and intensity of care. While the cost has increased steadily over the last 10 years, the last few years have seen a marked decrease in the consumption of personal health services. This is largely because of the economic turmoil we have seen over the past five years, which has made health care more of a luxury than a necessity for many Americans. However, recent trends suggest that the number of Americans who regularly visit the doctor is about to pick up again as our national fiscal situation stabilizes. This means that health care costs will begin to accelerate at a higher rate once again.

 The Top 4 Factors Driving Up the Cost of Health Care

The top 4 problems driving up the cost of health care today are the Fee-for-Service Reimbursement Structure, the Proliferation of Chronic Conditions, Patient Knowledge about Health Care Costs, and Uncoordinated Care.

1.  The Fee-for-Service Reimbursement Structure

The Fee-for-Service (FFS) reimbursement structure is one of the biggest barriers to efficient and affordable care. It incentivizes care providers to provide a higher and more meticulous level of care than is necessary. It does not tie expectations of quality to the patient care and instead rewards physicians based on the volume of tests and procedures performed. Currently, 78 percent of employer-sponsored insurance plans utilize a fee-for-service structure, and there is little traction to abandon this practice. While there are several government programs intended to tie quality expectations into patient care, including the Physician Quality Reporting System (PQRS) and Accountable Care Organizations (ACOs), these do not actually provide an alternative to the FFS structure. These programs supplement FFS with quality expectations but do not adequately address the problem of over-treatment and testing. A recent survey featured in the Archives of Internal Medicine found that 42 percent of primary care physicians felt their patients were receiving too much care.

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Two other big problems with the Fee-for-Service reimbursement structure are the fact that there is no coverage for services other than in-person care and the lack of funding for patient education programs. Without offering coverage for alternative care methods, efforts to modernize patient care and develop new lines of doctor-patient communication cannot move forward. Additionally, the lack of a payment model for doctor-patient communication means that there is no good channel for physicians to encourage and monitor patients with chronic conditions. This is further exacerbated by the lack of patient education programs. Many of the most widespread health problems facing our nation today could be prevented or reduced with a concerted campaign to increase awareness about risk factors. As Benjamin Franklin said, “An ounce of prevention is worth a pound of cure.” Unfortunately, the current structure of American health care is not designed to promote prevention, leading to another key factor driving up health care costs – the steady rise in chronic conditions.

2.  The Proliferation of Chronic Conditions

Chronic conditions represent one the largest and fastest growing problems in America, and the health care industry is struggling to find a way to efficiently address them. Nearly half of the U.S. population currently suffers from one or more chronic diseases. Today, approximately 84 percent of US health care dollars are spent on individuals suffering from chronic diseases. Clearly these represent a huge burden on America’s health care system. The two key causes of the increase in chronic conditions are the aging of the population and obesity.

The Congressional Budget Office (CBO) indicates that over the next 25 years population aging will be responsible for 52 percent of the growth in spending on federal health programs. Medicare enrollment is expected to increase by 1.6 million annually and by 2030 there will be nearly 81 million Medicare beneficiaries. This increase is daunting, particularly when considering the strain Medicare is already under. A sustainable and affordable way to provide care to aging Americans is crucial to keep Medicare sustainable. Though aging can’t be prevented, the other major cause of chronic conditions in America, obesity, could easily be addressed with aggressive public education campaigns. Without a concerted effort, the burden of chronic conditions will become overwhelming. Current estimates suggest that the number of Americans suffering from multiple chronic conditions will reach 81 million by 2020.

3.  Patients Don’t Know How Much Health Care Costs

Another reason health care costs are increasing that can indirectly be attributed to consumers is the lack of awareness about the cost of care and treatment. Patients rarely encounter the cost of their care because the actual expenses are covered by insurance. This means that they are not incentivized to request less care. In addition, shielding patients from costs means that there is no motivation to provide competitive pricing for patient care or health services.

Besides increasing the general cost of care, patient ignorance of health care costs has contributed to the absorption of many smaller practices by hospitals and large groups. This is not inherently bad, but research suggests that hospital consolidation in the 1990s raised inpatient prices by at least 5 percent. Because these cost increases were not felt by patients, there was little incentive to choose smaller practices with more limited tools and resources than larger hospitals and systems. Surprisingly, even with the consolidation of smaller practices, coordinated care is still more dream than reality.

4.  Uncoordinated Care

Coordinated care is a huge buzzword in the health care industry today. And it’s no surprise that this is an important topic. Our health care system’s current fragmentation of care and lack of coordination between facilities are the cause of several large expenses affecting the industry today. One problem caused by uncoordinated care is the significant increase in the amount of paperwork for both administrators and physicians. The cost of the administrative aspects of health care in America are estimated to be somewhere between $156 and $183 billion annually.

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Another big expense which is exacerbated by a lack of coordinated care is over-treatment in the form of readmissions and redundant procedures; these are estimated to cost between $158 and $226 billion annually. This is a particularly expensive problem for government health care programs. People who are dually eligible for Medicare and Medicaid represent 15 percent of the Medicaid and 16 percent of the Medicare population but account for nearly 40 percent of Medicaid spending and 27 of Medicare spending. Better coordination of care could help drastically reduce these costs.

Additional Reasons for the Increasing Cost of Health Care

Besides these four main reasons, there are several other factors which are contributing to the increasing cost of health care in America. The high cost of medical malpractice and the fear of being sued have resulted in many doctors practicing defensive medicine, ordering unnecessary tests and treatments to minimize their personal risk. Defensive medicine is estimated to cost the American health care industry between $45.6 and $650 billion per year.

New medical technologies are also contributing to the increase cost of health care. While many advancements improve the quality and safety of care, it is difficult to assess which technologies will improve the process of patient care and which merely increase health care costs. Assessing the effectiveness of these technologies is crucial to understand how best to apply new technology to patient care. However, there is not enough evidence-based information available to physicians about new procedures to help them make informed decisions about what treatment options actually improve patient care outcomes.

Finally, the reduced payment to physicians and care providers for treating Medicare and Medicaid patients are resulting in patients utilizing more expensive care options such as emergency rooms. Physicians are finding it unsustainable to treat patients with Medicare and Medicaid because these programs pay significantly less than private insurance companies (learn about opting out of accepting Medicare).

Conclusion

The multitude of factors affecting the cost of health care cannot be dealt with on a singular basis. These problems function in tandem and consequently must be considered as a whole. The Patient Protection and Affordable Care Act is designed to address some of these issues, but only time will tell how physicians can best address these increasing costs for their individual practices. The next few years will be crucial for the future of health care, and physicians and hospitals alike should get involved to help chart the future of America’s health care industry. Comment and let us know what you think about the increasing cost of health care below!