What is REALLY Driving Up the Cost of Health Care?

The cost of health care in this country, as everyone knows, is increasing at a rate higher than the current rate of inflation.  In 1990, total health expenditures in the U.S. were $714 billion.  In 2008, they were $2,338 billion (that’s $2.3 trillion)!! Why?  What is causing this rapid ascent?  Is it doctor’s greens fees or an increase in the cost of latex gloves? 

When I was in college, my economics professor told us that price is determined by the intersection of supply and demand. Well, demand has increased as the baby boomers have aged and the supply of doctors and hospitals has probably not grown fast enough to keep up with demand.  But that cannot account for the tremendous increases in costs we’ve seen in the last two decades. 

Baby boomers and the increased use of pharmaceuticals are often cited as the culprit, spending on drugs has almost doubled since 1990, but 52% of health spending result from hospital and physician expenses.  According to a Blue Cross Blue Shield Association study, the driving forces are investments in new technology and market consolidation.  From experience, I have seen local hospitals start to specialize and build units like heart hospitals.  Also, there have been hospital build-outs or ‘rebuilds’.  Anyone in the Elgin area can tell you about the new Sherman hospital and anyone who’s travelled the Eisenhower expressway can tell you how great the new Rush University hospital looks.  Additionally, the BCBSA study found that “in some cases merging hospitals is associated with price increases of 20 percent to 40 percent” and that “every one percent increase in hospital market share from consolidation leads to an approximate two percent increase in inpatient expenditures.”

2008 National Health Expenditures (click to enlarge)


And from a technological standpoint, knee, hip and other joint replacements have increased the use of X-rays and MRIs.  Heart stents have improved (and increased the cost of) outcomes for heart patients.  And of course, the treatments for cancer and other life threatening diseases have benefited from technological advances.  So, part of the issue is that as we get better at treating injury and disease, the cost of the tools used has increased as well.

Many people have cited malpractice and malpractice insurance as a major driver of cost.  Tom Baker, a professor of law and health  sciences at the University of Pennsylvania School of law, cites a study by Towers Perrin.

…medical malpractice tort costs were $30.4 billion in 2007, the last year for which data are available. We have a more than a $2 trillion health care system. That puts litigation costs and malpractice insurance at 1 to 1.5 percent of total medical costs. That’s a rounding error. Liability isn’t even the tail on the cost dog. It’s the hair on the end of the tail.

Back to prescription drugs for a moment.  Prescriptions as a percentage of total expenditures doubled in twenty years, but expenditures tripled in that time.  That means that the total amount spent on drugs went from almost $40 billion in 1990 to over $230 billion, a 575% increase!  Why so much, so fast?  According to Kaiser, three factors are responsible: more prescriptions are being written; newer and more expensive drugs are replacing older less-expensive ones; and manufacturers are increasing prices. In 1993, there were nearly 7 prescriptions per person written in the U.S.  As of 2008, that number has climbed to almost 11 prescriptions per person, while the population has grown from 240 million in 1990 to over 300 million today. 

Seems to me, if we are truly to get real health care reform, we need to start focusing on health management instead of sickness management.  All of us need to start taking greater responsibility for our health and ensure that we are doing all we can to be healthy.


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