What drives rising health-care costs?

• Author: Mack, Mark

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Government leaders across the United States are concerned with rising health-care costs--but what are the root causes of those large and persistent annual increases that we all have learned to take for granted? Understanding those forces could help you better understand the strategies you need to contain the cost of your employer-provided health benefit. Research conducted by the Commonwealth Fund found that family plan premiums for private employer-based health insurance (the type typically found in most local government organizations) grew an average of 7.3 percent a year between 2003 and 2013. Employee premium contributions grew an average of 9.3 percent a year in the same period. (1) The study also found that deductibles for firms of all sizes more than doubled over this timeframe, causing premiums and deductibles to combine for a greater share of an average family's income than ever before. These facts clearly illustrate the challenges posed by rising health-care cost.

This kind of cost growth is not inevitable; clear and striking differences exist in the U.S. rate and that of other industrialized nations. Observers might assume that the high costs in the United States are related to higher capacity (an ability to do more for patients) or greater utilization (patients electing to purchase more health care than their peers in other countries). They might also assume the higher spending totals produce a superior level of care. But some findings contradict this belief. Research conducted by the Organization for Economic Co-operation and Development (OECD) Health Division (2006) found that the United States fared poorly when compared against 30 other industrialized nations with market economies. Take the number of physicians per capita for instance. The OECD found that the United States had 5.8 physicians per capita, while the OECD median was 5.9, suggesting a roughly equivalent doctor to population ratio. (2) The OECD median for average hospital stay is almost two days longer than that of the United States, suggesting a higher utilization of hospital beds. Taken together, these findings seem to suggest that the United States simply has higher prices for similar goods. (See Exhibit 1.)

SPENDING MORE AND BUYING LESS?

If we conclude that the U.S. spends more than other industrialized nations for comparable utilization rates, the next logical question is why. Why is the United States willing to pay more than other countries for what appears to be similar health-care utilization? The answer to this question may be found not in what we purchase but rather in the way we purchase health care--namely, the separation of payment and consumption. Economists believe this separation of payment and consumption affects purchasing decisions by introducing an element of irrationality into the buying process--the true value of consumers' purchases are not determined in the same way they would be if consumers experienced the full cost at the time of consumption. Some researchers in the fields of behavioral and health economics think high-deductible health-care plans (HDHPs) offer a solution to this challenge.

Unfortunately, the "spend-more-buy-less" situation is not the only catalyst for rising health-care costs in the United States. Other, more traditional challenges--wasteful spending, prescription drug cost, advances in medical technology--also play a role, exacerbated by an aging workforce, unhealthy lifestyles, high administrative costs, and service provider consolidation that creates an apparently insurmountable climate of cost growth. Public-sector public-finance professionals need a robust understanding of this dynamic before they can begin addressing these challenges.

WASTEFUL SPENDING

Wasteful health-care spending generally takes the form of redundant, inappropriate, or unnecessary tests and procedures that are recommended by physicians (and also frequently requested by patients). Some believe physicians "over-prescribe" in an effort to avoid litigation or to appease demanding patients, while others believe the goal is simply to increase profitability. The...