5 reasons why healthcare costs are rising

It’s no secret that the United States has the most expensive healthcare system in the world. According to a report from the Centers for Medicare and Medicaid Services (CMS), healthcare spending reached $4.3 trillion in 2021. CMS estimates that national health expenditures will reach $6.8 trillion by 2030.

But why is U.S. healthcare spending so high? Definitive Healthcare’s commercial intelligence helps organizations gain insights into the drivers behind market trends. In this case, we’ve identified five factors that contribute to rising healthcare costs. Our key data sets include payor mix, medical claims, and technology implementations.

1. Aging population

The Baby Boomers, one of America’s largest adult generations, is approaching retirement age. Because of this, the 65+ population is growing at an unprecedented rate. According to the U.S. Census Bureau, 21 percent of the entire population will be age 65 or older by 2030. Older Americans will make up almost one-quarter of the population by 2060.

This growth is likely to contribute to rising healthcare costs in two important ways:

1. Growth in Medicare enrollment
2. More complex, chronic conditions

At age 65, Americans become eligible to enroll in the Medicare federal health insurance program. As of March 2023, Medicare had more than 65 million beneficiaries. The total number of Medicare beneficiaries will dramatically increase in 2030. By then, all Baby Boomers will be age 65 or older.

Because Medicare is a publicly funded program, this enrollment growth will also impact national health expenditures. According to CMS, the U.S. spent $900.8 billion on Medicare in 2020. As a result of enrollment growth, CMS projects that Medicare spending will increase by 7.6% per year through 2028.

As Medicare enrollment grows, payor mix provides a useful indicator of hospital revenue and financial performance, as well as the population density of elderly patients.

Payor mix refers to the share of patients with privately versus publicly funded insurance plans. Hospital payor mix will change as Medicare enrollment increases and more patients seek publicly funded insurance.

On top of Medicare growth, chronic conditions are more prevalent among the elderly population. The National Council on Aging reports that 80% of older Americans have a chronic condition, and 77% of older adults have two or more chronic conditions. The most common of these conditions include:

• Hypertension
• High cholesterol
• Diabetes
• Coronary heart disease
• Alzheimer’s disease

Chronic conditions like these could lead to health complications that require ongoing treatment or intervention. Some elderly adults with chronic conditions might also need long-term care at a nursing home or assisted living facility (ALF). Either of these outcomes could contribute to rising healthcare costs and overall spending in the United States.

2. Chronic disease prevalence

Six out of every 10 adults in the United States have a chronic disease or condition, according to the Centers for Disease Control and Prevention (CDC). The most common chronic conditions in the U.S. include:

• Heart disease
• Stroke
• Cancer
• Diabetes
• Chronic kidney disease
• Chronic obstructive pulmonary disease (COPD)

We can identify diagnosis volumes and comorbidity information using Definitive Healthcare’s Atlas All-Payor Claims data. These data are an important tool for understanding chronic disease prevalence in the United States. All-payor claims data can provide insight into comorbidities, common procedures or areas with a high volume of specific chronic disease diagnoses.

Chronic conditions often require long-term medical attention. Some conditions may also limit daily living activities, which could warrant use of home health care or other support services. Some people also suffer from anxiety, depression, and other mental health disorders due to the challenges of living with a chronic illness.

All these factors make caring for chronic disease patients more complex and resource-intensive. There is a strong relationship between healthcare costs and chronic diseases in the United States. According to a report from the American Action Forum, the U.S. spends about $3.7 trillion each year for the treatment of chronic health conditions and the resulting loss of economic productivity.

Much of this healthcare spending goes toward services like routine office visits, prescriptions, outpatient treatments or emergency care.

In addition, the COVID-19 pandemic has caused some chronic disease patients to delay or avoid essential care. This means that chronic disease patients are spending less on healthcare services in the short term. But this may ultimately have damaging health and financial effects in the long term.

When chronic disease patients delay care, they risk suffering from potentially life-threatening complications. Those who seek care in time are more likely to develop long-lasting side effects as a result. The long-term management of those side effects will likely contribute to rising national health expenditures and consumer costs.

3. Rising drug prices

According to the Organisation for Economic Cooperation and Development (OECD), the average American spent about $1,126 on prescription drugs in 2019 (the most recent year with internationally comparable data). This per capita cost is more than double that of other developed countries.

These costs could increase along with prescription drug spending. Prescription drug spending in the U.S. will grow by 6.1 percent each year through 2027, according to CMS estimates.

The spending growth is due in part to a continuing emphasis on specialty pharmaceuticals and precision medicine. Specialty drugs are often experimental therapies used to treat cancers, autoimmune diseases or chronic conditions. Some therapies utilize genetic data to deliver a highly targeted, personalized treatment.

The complex nature of these drugs makes them very costly to develop and distribute. A new specialty drug called Hemgenix is the most expensive drug ever approved by the Food and Drug Administration (FDA). This gene therapy for hemophilia B costs $3.5 million for a one-off infusion. No healthcare providers submitted a claim for Hemgenix so far in 2023.

Drug pricing strategies also contribute to rising healthcare costs. Drug manufacturers establish a list price based on their product’s estimated value, and manufacturers can raise this list price as they see fit. In the United States, there are few regulations to prevent manufacturers from inflating drug prices in this way.

4. Healthcare service costs

Americans visit the doctor at half the rate of other developed countries, according to an analysis published by The Commonwealth Fund. But the U.S. also spends more on healthcare than any other country.

How is this possible? The cost of healthcare services is significantly higher.

For instance, cesarean-sections (C-sections) are among the most common inpatient procedures (includes extraction of products of conception, open approach) in the United States. According to Definitive Healthcare data, the average cost of a c-section was $5,525 in 2021. This cost does not include other fees associated with medical interventions, complications, or an overnight hospital stay.

The United States has consistently higher procedure costs than other developed countries, according to a 2020 price report.

A 2017 report found that the average cost of a coronary artery bypass graft (CABG) surgery in the U.S. was $78,100. In comparison, the same procedure cost only $11,700 in the Netherlands. The U.S. also reported higher costs for outpatient procedures like MRI scans and colonoscopies.

A 2018 JAMA study suggests that three key factors contribute to the high cost of healthcare in the United States:

1. Physician salaries
2. Administrative costs
3. Prescription drug prices

The JAMA study found that physician salaries in the U.S. were higher than those in other countries. In 2016, a general physician made an average salary of $218,173 per year. According to the study, average physician salaries ranged from $86,607 to $154,126 in other countries.

A 2021 Medscape survey also found that physicians in the U.S. earned more than in any other country. On average, U.S. physicians reported earning $316,000 per year, followed by Germany ($183,000) and the U.K. ($138,000). 

Together with rising administrative costs and drug prices, these three factors contributed most to higher healthcare prices in the United States.

5. Administrative costs

According to another JAMA study, the U.S. spent about $950 billion on healthcare administration in 2019. This spending accounted for 25% of national health expenditures that year.

Why is administrative spending so high in the United States? The U.S. operates within a complex, multi-payor system, in which healthcare costs are financed by many different payors. With so many stakeholders involved, healthcare administration becomes a complicated, inefficient process.

These inefficiencies contribute to excess administrative spending. The main component of excess administrative spending is billing and insurance-related (BIR) costs. These are overhead costs related to medical billing and include services like claims submission, claims reconciliation, and payment processing.

Insurance company profits make up the largest share of BIR costs. Healthcare providers also receive part of these administrative costs for notetaking and record-keeping during the medical billing process.

According to a 2019 McKinsey & Company report, the U.S. could reduce administrative spending by 30% by automating and streamlining BIR processes. Technologies like claims processing software can help automate these processes. But according to Definitive Healthcare technology data, only about 15% of U.S. hospitals use claims processing software.

Automating certain aspects of claims processing can increase payor productivity and decrease costs.

Learn more

By identifying regions with high procedure costs, healthcare organizations can help implement cost-cutting measures in supply chain spending or other hospital expenses.

To get deeper insights into opportunities for cost savings and operational efficiencies, check out our healthcare commercial intelligence platform. Start your free trial today.

Updated August 2023