Medical Expenses predicted to rise

Bluegrass Heritage Insurance Group


Health expenditures in the United States neared $2.6 trillion in 2010, over ten times the $256 billion spent in 1980.[1] The rate of growth in recent years has slowed relative to the late 1990s and early 2000s, but is still expected to grow faster than national income over the foreseeable future.[2]  Addressing this growing burden continues to be a major policy priority. Furthermore, the United States has been in a recession for much of the past decade, resulting in higher unemployment and lower incomes for many Americans.  These conditions have put even more attention on health spending and affordability. [1]

Since 2002, employer-sponsored health coverage for family premiums have increased by 97%, placing increasing cost burdens on employers and workers. [3] In the public sector, Medicare covers the elderly and people with disabilities, and Medicaid provides coverage to low-income families.  Enrollment has grown in Medicare with the aging of the baby boomers and in Medicaid due to the recession.[1], [4]  This means that total government spending has increased considerably, straining federal and state budgets.  In total, health spending accounted for 17.9% of the nation’s Gross Domestic Product (GDP) in 2010. [5]



How is the U.S. health care dollar spent?

Hospital care and physician/clinical services combined account for half (51%) of the nation’s health expenditures.National Health Expenditures, 2010

   Total = $2.3 Trillion

Source: Martin A.B. et al., “Growth In US Health Spending Remained Slow in 2010; Health Share of Gross Domestic Product Was Unchanged from 2009,” Health Affairs, 2012.



What is driving health care spending?

While there is broad agreement that the rise in costs must be controlled, there is disagreement over the driving factors.  Some of the major factors that have been discussed in cost growth are:

  • Technology and prescription drugs– For several years, spending on prescription drugs and new medical technologies has been cited as a primary contributor to the increase in overall health spending; however, in recent years, the rate of spending on prescription drugs has decelerated.[1]  Nonetheless, some analysts state that the availability of more expensive, state-of-the-art medical technologies and drugs fuels health care spending for development costs and because they generate demand for more intense, costly services even if they are not necessarily cost-effective. [6]
  • Rise in chronic diseases – Longer life spans and greater prevalence of chronic illnesses has placed tremendous demands on the health care system.  It is estimated that health care costs for chronic disease treatment account for over 75% of national health expenditures. [7]  In particular, there has been tremendous focus on the rise in rates of overweight and obesity and their contribution to chronic illnesses and health care spending.  The changing nature of illness has sparked a renewed interest in the possible role for prevention to help control costs.
  • Administrative costs – At least 7% of health care expenditures are estimated to go toward for the administrative costs of government health care programs and the net cost of private insurance (e.g. administrative costs, reserves, taxes, profits/losses).[1] Some argue that the mixed public-private system creates overhead costs and large profits that are fueling health care spending.[8]



ACA and Cost Containment

The nation’s efforts to control health care costs have not had much long-term effect [9], prompting a debate over what proposals are actually able to reduce costs for the long-term.  Approaches are largely divided by debate over a stronger role for government regulation or market-based models that encourage greater competition.  Costs emerged as a central element of the national health reform debate that ensued before the passage of the Affordable Care Act (ACA) of 2010.  Major ACA measures aimed at cost containment include[10]:

  • Greater government oversight and regulation of health insurer premiums and practices
  • Increasing competition and price transparency in the sale of insurance policies through Health Insurance Exchanges
  • Payment reforms that aim to reduce payments for treatments and hospitalizations resulting from errors or poor quality of care
  • Funding for comparative effectiveness research (CER) that compares different interventions and strategies to prevent, diagnose, treat, and monitor health conditions.[11] The Patient-Centered Outcomes Research Institute (PCORI) was established by the ACA to commission CER guided by patients, caregivers, and the broader health care community. [12]
  • Refocusing medical delivery systems to be patient-centered and improve the coordination and quality of care (e.g. ACOs, medical homes). [13]

Other proposals and practices directed at controlling costs exist, such as support for wider use of health IT in the delivery system, increasing consumer out of pocket costs, improving health efficiency and quality of care, reforming the tax treatment of health insurance, and a single payer plan.  As the nation struggles with a faltering economy, health care costs will surely continue to be at the forefront of policy debates.



Discussion Questions

  • What are the major drivers of the rise in health care spending? How will the ACA affect these areas?
  • How can health care be made more affordable without limiting access to necessary care?
  • What role should government play in controlling increases in the cost of care and the cost of health coverage? What different choices do state and federal policymakers have in containing costs?
  • What is the responsibility of individuals in the cost of their care? Are health savings accounts and high deductible insurance policies an approach that should be expanded? What are the concerns for low-income individuals?



1Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, National Health Care Expenditures Data, January 2012.
2Robert Wood Johnson Foundation, High and rising health care costs: Demystifying U.S. health care spending, October 2008.
3Kaiser Family Foundation and Health Research and Educational Trust. Employer Health Benefits 2012 Annual Survey. September 2012.
4 Kaiser Family Foundation, Medicare Chartbook, 2010.
6Congress of the United States, Congressional Budget Office. Technological Change and the Growth of Health Care Spending, January 2008.
7Centers for Disease Control and Prevention.  Rising Health Care Costs Are Unsustainable. April 2011.
8Recent opinions/ reports have focused on the viability of a single-payer system in the U.S. W.C. Hsiao’s article “State-based single-payer health care- as solution for the United States?” explores potential adoption among states, and R. Feldman explores unregulated markets vs. single-payer systems in “Quality of care in single-payer and multipayer health systems.”
9Altman, D. and L. Levitt. February 23, 2003. The Sad History of Health Care Cost Containment As Told in One ChartHealth Affairs Web Exclusive. Key Features of the Law. HHS, 2011.
12Patient-Centered Outcomes Research Institute. 2012. Accountable Care Organizations. HHS, 2011.