The Rising Cost of Health Care and Its Causes

Cost-of-careMy Comments: The subtitle to this was 2 Reasons Why Health Care Costs So Much. Couple this with my blog post from yesterday and it seems appropriate to follow up with an article that might help explain why we pay so much for health care in exchange for relatively poor outcomes compared with much of the world.

By Kimberly Amadeo / January 12, 2017

In 2015, U.S. health care costs were $3.2 trillion. That makes health care one of the largest U.S. industries, equaling 17.8 percent of Gross Domestic Product. Compare that to 1960, when health care only cost $27.2 billion, just 5 percent of GDP.

That translates to $9,990 a year per person in health care costs. That was just $146 per person in 1960. Health care costs rose faster than the annual income.

That means health care consumed 4 percent of earnings in 1960 compared to 6 percent in 2013. (Source: “Health Insurance: Premiums and Increases,” National Conference of State Legislatures, November 5, 2016.)

The underlying causes of this massive increase were a combination of government policy and lifestyle changes. The United States relies on company-sponsored private health insurance. The Federal government created Medicare, Medicaid, and other programs to help those who were without insurance. These programs spurred demand for health care services, allowing providers to raise prices. Many other programs designed to reform health care and cut costs increased them instead.

Second, was an increase in chronic illnesses, like diabetes and heart disease. They are responsible for 85 percent of health care costs. Almost half of all Americans has at least one of them. They are expensive and difficult to treat.

Government Policy
Between 1960 and 1965, health care spending increased by 8 percent a year. That’s because health insurance expanded. As it covered more people, the demand for health care services rose. By 1965, households paid out of pocket for 44 percent all medical expenses.

Health insurance paid for 24 percent.

From 1966 to 1973, health care spending rose 11.9 percent a year. Medicare and Medicaid covered more people, allowing them to use more health care services. Seniors were able to move into expensive nursing home facilities. As demand increased, so did prices. Health care providers put more money into research. That created more innovative, but expensive, technologies.

Medicare helped create an overreliance on hospital care. Emergency room treatment is very expensive, making up one-third of all health care costs in America. By 2011, there were 136 million emergency room visits. That’s because an astonishing one out of five adults uses the emergency room each year. (Source: “Fact Sheet,” National Center for Health Statistics, July 2014. “Fact Sheet,” National Center for Health Statistics, February 2014.)

In 1971, President Nixon implemented wage-price controls to stop relatively mild inflation. At first, artificially low health care prices created higher demand.

In 1973, Nixon authorized Health Maintenance Organizations to cut costs. These pre-paid plans restricted users to a particular medical group. It provided millions of dollars in start-up funding for HMOs. It required employers to offer them when available. (Source: “Nixon’s HMOs Hold Lessons for Obama’s ACOs,” Kaiser Health News, October 21, 2011.)

But Nixon dropped the gold standard that same year. As the dollar’s value plummeted, it unleashed double-digit inflation. Health care costs grew at the same rate.

From 1974 to 1982, health care prices rose 14.1 percent a year for three reasons. First, they rebounded after wage-price controls expired in 1974. Second, Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA). It exempted corporations from state regulations and taxes if they self-insured. Companies took advantage of these lower-cost and flexible plans. Third, home health care took off, growing 32.5 percent a year.

Between 1983 and 1992, health care costs rose 9.9 percent annually. Congress expanded Medicaid to include illegal immigrants, children (through CHIP), and pregnant women. Prescription drug costs rose 12.1 percent a year. Home health care prices increased 18.3 percent annually.

Between 1993 and 2010, costs grew 6.4 percent a year. In the early 1990s, health insurance companies tried to control costs by again spreading the use of HMOs. Congress then tried to control costs with the Balanced Budget Act in 1997. But that forced many health care providers out of business. So Congress relented on payment restrictions in the Balanced Budget Refinement Act (BBRA) in 1999 and the Benefits Improvement and Protection Act of 2000 (BIPA).

After 1998, people rebelled and demanded more choice in providers. As demand increased again, so did prices. This time, pharmaceutical companies invented new types of prescription drugs. They advertised directly to consumers, creating additional demand. (Source: “History of Health Spending in the United States, 1960-2013,” Centers for Medicare and Medicaid Services, November 19, 2015.)

In 2003, the Medicare Modernization Act added Medicare Part D to cover prescription drug coverage. It also changed the name of Medicare Part C to the Medicare Advantage program. The number of people using those plans tripled to 17.6 million by 2016. Those costs rose faster than the cost of Medicare itself.

The nation’s reliance on corporate private health insurance left many people without a primary care physician. By 2009, half of the people (46.3 percent) who used a hospital said they went because they had no other place to go for health care. These uninsured patients cost hospitals a staggering $10 billion a year. The hospitals passed this cost along to Medicaid. (Source: “Emergency Room Use Among Adults Aged 18–64: Early Release of Estimates From the National Health Interview Survey, January-June 2011,” Centers for Disease Control and Prevention, May 2012. “The Emergency Medical Treatment and Active Labor Act (EMTALA): What It Is and What It Means for Physicians,” National Institute of Health, October 2001.)

TK – if you are interested, and I think you should be, I invite you to read the rest of it at the source, which is HERE.