The US spends over $2.6 trillion on healthcare or about 18% of GDP due to a number of healthcare cost drivers. Other nations are able to provide healthcare services for considerably less: U.K. – 9.6% GDP, Germany – 11.6% GDP and Japan – 9.5% GDP. Despite our high level of spending on healthcare, the US lags in healthcare quality. This level healthcare spending is an unsustainable burden on the United States economy, more specifically businesses, employees and consumers. Businesses who provide health insurance are less competitive internationally, employees experience stagnation of wages and consumers spend more on healthcare and less on other necessities. Below we highlight 10 drivers of healthcare costs in the US.
The Fee-for-Service (FFS) payment model creates a strong financial incentive to perform a high volume of tests and services, regardless of whether those services actually improve quality or contribute to the overall treatment of a patient.
Fragmentation of Care Delivery
With providers being paid for services rather than care quality and patient outcomes, the fee-for-service system, does not provide a financial incentive to coordinate care with other providers. This leads to fragmentation of care, inefficiencies, over-treatment and greater potential for medical errors.
The payment and care delivery complexities of the US healthcare system leads to increased amounts of paperwork and the need for more administrative resources. This raises provider costs as more time is consumed in paperwork of numerous types of health insurance plans, different processes for authorizing services, establishing eligibility and filing claims. Navigation of a system so complex requires an exasperating amount of administrative time and money.
Over the next 25 years, population aging will be responsible for 52% of the growth in spending of major federal health programs such as Medicare. This growth spurt reflects the aging of the Baby Boomer generation as well as greater use of technological advances in medicine – leading to longer life spans. End of life care requires expensive services such as inpatient hospital stays, hospice care, outpatient care, home health and nursing facility care.
Chronic Diseases & Lifestyle Choices
Chronic disease and lifestyle choices also add to the overall cost of healthcare. Chronic diseases utilize high volumes of a complex mix of services, resulting in about 84% of US healthcare dollars and approximately 99% of Medicare spending. In 2012, the CDC noted that many chronic diseases are preventable and are often hastened by poor lifestyle choices.
Advances in medical technology can either enhance efficiency or do just the opposite if over-utilized. Unnecessarily using new technology when there is a less costly treatment that is equally effective, drives up healthcare spending. Advanced technology’s true value is realized in its ability to improve patient outcomes and efficiency.
Lack of Transparency in Cost & Quality Information
There is an absence of information to enable the fair comparison of the quality of care, outcomes and costs of medical services. Without this information, patients and clinicians are unable to make informed choices regarding the best and most cost effective medical providers.
Market Competition & Consolidation
Organizing and consolidating fragmented providers encourages more efficient and coordinated care. However, the risk of consolidation is the creation of large hospital groups holding an imbalanced amount of market share, and demanding higher prices. This also reduces the incentive for these providers to innovate and create further efficiencies. Without a competitive market, dominant providers tend to charge considerably higher prices than in competitive environments. Insurance companies are consolidating as well, gaining more market share that can be used to negotiate lower provider reimbursements.
Medical Malpractice, Fraud and Abuse
Providers often accumulate high medical costs by ordering several unnecessary tests to offset the risk of malpractice lawsuits, otherwise known as defensive medicine. Defensive medicine costs are approximately $45.6 billion to $650 billion per year. Medical fraud and abuse is costly as well. Fortunately, there are public and private resources devoted to detecting, investigating and fighting fraud, waste and abuse that have proven highly effective. New provisions under PPACA combat fraud and abuse through new approaches like prescreening providers and data sharing requirements.
Trends in Clinical Specialization and Patient Access to Providers
Lack of accessible primary care providers drives patients to specialists, or worse, to emergency departments in order to obtain primary care. The ratio of specialists to primary care physicians is significantly skewed. Many medical students are encouraged to become specialists instead of primary care providers because of higher pay and perceived recognition. Primary care providers are reimbursed for services at lower rates and paid between 36 to 48% lower wages than specialists while often having to put in longer work hours. With the possibility of earning more to eliminate educational debt and sustain a profitable practice, medical students have large incentives to choose a specialty, leaving the primary care shortage a difficult cycle to end.
The factors that drive healthcare cost growth are complex with many of these cost drivers being inter-related. Through initiatives set forth by the PPACA, there is potential for improvement in several of these areas. New incentives for value based care, penalties for the misuse/abuse of services, new care delivery models and payment systems all hold the potential to reduce costs while boosting quality. Innovation in these areas will be through both public and private initiatives and will require cooperation of both providers and payers.
Take a look at our Slideshare Presentation on Healthcare Cost Drivers