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5 Reasons Why Healthcare Costs are Rising

June 26, 2019 BY Tory Waldron

5 Reasons Why Healthcare Costs are Rising

It’s no secret that the United States has one of the highest costs of healthcare in the world, costing families thousands of dollars a year in wages, out-of-pocket costs, and increased taxes -- and this trend does not appear to be slowing anytime soon.

In fact, a February 2019 report from Health Affairs predicts national health expenditures are projected to continue to grow at an average annual rate of 5.5 percent over the next 10 years, and estimated to reach a whopping 19.4 percent of gross domestic product by 2027. 

Here are 5 possible reasons for the high costs associated with healthcare in the U.S.: 

1) Chronic diseases

Currently, a small number of chronic illnesses like heart disease, stroke, lung and kidney disease, cancer, diabetes, and Alzheimer's account for the majority of healthcare spending in the United States. According to the Centers for Disease Control (CDC), 6 in 10 adults in the U.S. have a chronic disease, and 4 in 10 have two or more. Many of these diseases are preventable – resulting from excessive alcohol and tobacco use, poor nutrition, and lack of physical activity.

Chronic diseases account for nearly 75 percent of aggregate healthcare spending, or an estimated $5,300 per person annually. In terms of Medicaid and Medicare, chronic disease treatment comprises an even larger portion of spending: 96 cents per dollar for Medicare and 83 cents per dollar for Medicaid. The Milken Institute estimates that the treatment of these chronic diseases costs the U.S. economy $1.1 trillion dollars annually, likely because care for these patients costs one-fourth of the Medicare budget.

In a lot of cases these diseases are preventable but, as healthcare costs continue to rise, patients may be less inclined to visit their doctors for yearly checkups and instead wait to experience dire symptoms before scheduling visits. In their last six months of life, these patients go to the doctor's office 29 times on average, with expensive visits to the emergency room, intensive care units, and surgery centers.

Let's take a deeper dive into diabetes, one of the most common chronic diseases in the U.S.:

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Fig 1: Up-to-date Medicare diagnosis claims for diabetes sourced from Definitive Healthcare's Therapy Area Analytics and Procedure Analytics visual tool

In this map, we see that the Southeast and Midwest areas of the U.S. contain the most patients with diabetes (841,000 and 643,000, respectively), which may be a result of higher obesity rates or aging populations in these geographies, and in rural populations with little access. Changes in lifestyle and diet could prevent many of the chronic diseases driving up the nation’s health care costs, improving health and reducing the need for expensive treatments.

2) Aging baby boomer population

Baby boomers are the nation's largest living adult generation, and they are moving toward retirement at a rapid pace. Around 10,000 baby boomers turn 65 each day and are exiting the workforce at a strong and steady pace, now known as the "silver tsunami". The inevitable increase in demand for healthcare could push America’s current health care system to its breaking point, resulting in higher inflation, higher taxes, and reduced health benefits for everyone.

With so many baby boomers leaving their private medical insurance behind and transitioning into Medicare and Medicaid services, U.S. healthcare costs are expected to continue to grow as this aging generation requires more care than ever. The Congressional Budget Office (CBO) reported that spending for Medicare, Medicaid, and total health care costs accounted for 3 percent each of the gross domestic product (GDP) in 2009 (prior to the silver tsunami). If this rate continues, the influx of 78 million aging Americans will result in Medicare spending increasing by 8 percent by 2035, and 15 percent by 2080. 

Simply put, the more people that seek health care and the older those people are, the costlier health care becomes, assuming conditions don't allow for supply to meet increased demand. 

3) Provider shortages

The United States will see a shortage of up to nearly 122,000 physicians by 2032, according to data published by the AAMC (Association of American Medical Colleges). This is partly because 55 percent of all registered nurses are 50 years old or older, and 52 percent of the active physician workforce is 55 or older.

As providers begin their mass exodus toward retirement, the pressure to will be felt by patients, facilities, and certain specialty areas that are already facing physician shortages. In fact, certain specialties are seeing more seasoned providers retiring than new candidates entering the market, including family medicine, psychiatry, internal medicine, nurse practitioners, OB/GYNs, hospitalists, and geriatric specialists.

The U.S. Census Bureau also anticipates adults over 65 will outnumber children under 18 for the first time in 2035. As the population grows and demographics favor an aging public, demands on the U.S. healthcare system will expand, and costs will only skyrocket as a result of CMS spending. Last year, Kaiser Family Foundation reported that government-funded Medicare and Medicaid account for more than $1 of every $3 of U.S. health-care spending and $1 of every $4 in the federal budget. Medicare has been growing at more than twice the rate of inflation and is forecast to continue to accelerate as baby boomers age.

Definitive Tip: Interested in learning more about, or solving, healthcare staffing shortages? Definitive Healthcare's Staffing and Recruiting Analytics dashboard, located within the DHC Visuals platform, can help your organization assess and understand the physician staffing market. This dashboard unlocks facilities that show signs of understaffed physicians, allows users to differentiate between specialties at individual facilities, and much more.

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Fig 2 A snapshot of two capabilities in the Definitive Healthcare Staffing and Recruiting Analytics dashboard, available in the DHC Visuals platform.

4) High drug prices & lack of transparency

Americans spend about $1,200 on prescriptions drugs every year, according to the latest figures from the Organization for Economic Cooperation and Development (OECD). That’s more than people pay in any other developed country in the world, according to recent STAT research. On one hand, this is a result of new, expensive drugs entering the market, which are only under patent for a limited time; pharmaceutical companies need to offset the costs of researching and producing these new drugs while also maintaining a revenue stream, so many new drugs entering the market are sold at high costs.

But, according to a January 2019 Health Affairs study, the skyrocketing cost of many prescription drugs in the U.S. can also be blamed on industry-wide price increases. Brand-name oral prescription drug prices rising more than 9 percent between 2008 and 2016, and injectable drugs rising more than 15 percent during that time.

However, most seem to agree that the lack of prescription price transparency is the biggest cause for these high costs. Making cost information public could increase market and social pressure on health care providers to lower prices, as patients begin to shop around for their own care. 

Earlier this year, President Donald Trump outlined a set of proposals that he anticipated might lower the high cost of prescription drugs for millions of Americans. One of these proposals would change how doctors are paid for very expensive drug treatments under Medicare Part B plans, and another would require companies to include prices in TV drug ads. And, as of June 24, 2019, President Trump announced a new executive "healthcare transparency" order that would reveal price negotiations between providers and payors, which would allow patients to receive an estimate of their out-of-pocket costs prior to receiving care.

5) Administrative costs

Even smaller costs can add up. Anyone interacting with the U.S. health care system is bound to encounter examples of unnecessary administrative complexity—from filling out duplicate intake forms to transferring medical records between providers.

The U.S. health system's reliance on multiple payors also contributes to administrative health care costs. A typical hospital must contend not only with public health programs, like Medicare and Medicaid, but also with many private insurers, each with its own set of procedures and forms (whether electronic or paper) for billing and collecting payment.

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