10 Drivers of Unsustainable Healthcare Costs

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October 2nd, 2012
Categories: Healthcare Reform

Healthcare Cost DriversThe 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.

  1. Fee-for-Service Reimbursement

    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.

  2. 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.

  3. Administrative Burden

    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.

  4. Population Aging

    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.

  5. 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.

  6. Medical Technology

    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.

  7. 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.

  8. 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.

  9. 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.

  10. 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



  • Skip Paris says:

    There are several points of disagreement with this essay.

    Having debated the pros and cons of various delivery systems I cannot agree with the contention that America somehow lags in quality. Are we the best in everything? Probably not, but in many of the metrics that measure the actual performance of our system (as opposed to the impact of lifestyle for example) we are doing better than the socialized systems.

    While an incentive for "churning" might exist in the FFS model, what evidence is there that this actually occurs?

    The essay's second point is just a variation on the theme made in the first. "Churning" patients with good insurance by referring them to a network of like minded providers might actually occur. I'd enjoy looking at the evidence though.

    While the administrative burden placed on providers by managed care contracts is large, it is as nothing compared to cost of compliance with the bewildering array of contradictory regulations promulgated by our government. The money spent by providers who must read, understand and comply with thousands of Federal Register pages does absolutely nothing to improve the health of our citizens. I agree, let's reduce the admin burden by getting the government out of the business.

    Demographics aren't destiny. We cannot change the fact that we face a massive, aging population. This is an opportunity for Americans to once again demonstrate why we are a world leader. We couldn't overcome gravity until the Wright Brothers did it. We'll figure this out too.

    It is clear that the market is already addressing the lifestyle issue. Anyone applying for a job today faces testing, not only for illicit drugs, but increasingly for tobacco use as well. The emphasis on healthy food choices now prevalent in America will result in market changes based on BMI as well.

    The chronic illnesses that aren't caused by lifestyle choices will remain an issue. There is no bad habit that one may engage in that will result in MS for example. Yet the folks afflicted with diseases like this are poorly served by our current system. Changes that improve this would be most welcome.

    The explosion of new treatment tools and techniques is a testament to the dynamism of the American economy. I have watched the futile efforts to control this engaged in by our government with amusement. Who can forget the CON laws? How many remember the attempt by medicare to control the use of a new technology called "CAT Scans" by reviewing each claim? Not one of those attempts worked.

    Americans want the best, and we want it for the lowest cost. If we truly wish to insure that new technology has a positive impact, find a way to make the patient a stakeholder in the financial impact of clinical decisions.

    The "lack" of transparency noted in the essay is a non issue. People understand and judge providers based on the things they know and value. A hospital with a poor reputation generally earned it based on those values the patients prefer. The best diagnosticians in the world can't overcome inedible patient meals.

    Point number Eight cries out for proof. First, what data is there to support the contention that consolidation will lower cost and improve performance? It sounds good on paper, but is there evidence that it is true in practice?

    It is my experience that orthopedic surgeons are often organized into large practices. Is there data to prove that this consolidation results in higher reimbursement for them? If so, why is that a problem? As free citizens shouldn't we be able to arrange our affairs as we see fit?

    The contention that a single large payer can control the market for insurance speaks to the failure of the regulatory regime. Virtually every state has an insurance commission and a bewildering array of rules and regulations. If these have failed to prevent the operation of the dynamic the essay notes, why should we believe that more government will do any better?

    Point nine makes mention of the cost of defensive medicine but fails to offer a solution. Instead of imposing new rules on the providers, why not change the legal system to minimize the impact of needless lawsuits? Americans would breath a sigh of relief when the endless ads for PI attorneys went away.

    As for fraud and abuse, the commercial providers have been using expert systems to detect this for decades. It is the government programs that lag in this respect. Moving the government out of the business will allow us to bring existing technologies to bear without a new round of costly regulation.

    The solution to the lack of primary care physicians is simple, but not easy: reform the education system. What happened to healthcare in the '70's is happening to education now. As the society, through the government, throws more money at the industry its cost rise to absorb it all. The debt faced by all students now is a direct result of yet another well intentioned by ultimately misguided effort to distort the market.

    Further, it is interesting to note that while the government makes significant effort at reducing the number of physicians we educate (through the reimbursement mechanism) there is no such effort at reducing the number of lawyers that are churned out. We are 2% of the world's population, yet we have 50% of the lawyers.

    Who will the baby boomer's need more? A primary care physician or a Personal Injury Lawyer?

    • William Bozoki says:

      Thanks for the comment Skip. You have made many mentions of "the Government" in your comment and I am rather surprised that you take issue with every "cost driver" listed in the article. I would just like to point out that the article is not written to be for or against government intervention in healthcare. Instead, it is simply a listing of issues that are driving the cost healthcare to unsustainable levels. These issues are widely agreed upon by medical providers, patients and payers both public and private.

  • John Jeselnick says:

    Well done

  • James McGee says:

    You overlook - as do most people - Fragmentation of Patient Delivery.
    How do patients enter the fragmented delivery system you describe? Through an even more fragemented "patient delivery system". Instead of a system of universal eligiblity, individuals must establish eligibility by
    age, or
    disability, or
    income and residence, or
    employment status, or
    employment status of family members
    Not to mention an infinte number of sub qualifications within each of those.
    And then depending on which portal you pass, you enter a different segment of tyhe the delivery system

  • Freddy Schnitzler says:

    I agree definetely in 9 out of the 10 points immediately,still but would modify the aging section a little. It often appears in articles that we face higher medical cost because we are getting older. KIHASA , Korean research institute found out that aging here in Korea results for less than 10 % in cost increase. If we look at the ratio between life expectancy and total health expenditure among OECD countries, we see that there is no clear relation. US for example has lowest life expectancy, yet highest cost.
    Still, accounting wise it appears that elder peole account most of cost, but still has to do with the fact that end of life cost consume most health expenditure, yet this effect is independant from life expectancy, we could even say that the fact that we get older allows us a longer premium period before we get the end of life bill.
    The reason for cost increase at old age is not the fact that we age but is based in exactly the other nine points mentioned with the basic focus on fee for service driven technological overuse and the increase in chronic diseses. Knowing that 75 % of chronic diseses are preventable, knowing that technology is not even a driver for higher life expectancy I think we should know where to work on. Increase wellness and healthy living, produce babies and go back from technology care to physicions consultation.

    Freddy Schnitzler, Vive President Samsung Fire&Marine Insurance R&D Center Health and Long Term Care