Reasons for Increases in Healthcare Costs

Numerous experts have commented on why healthcare costs are rising as fast as they are. One really good expert is Uwe Reinhardt, who in his book, Priced Out (2019) listed the following with the last two the ones he believed were the real causes:

·         Ability to pay (discounted as the reason in comparison with other countries)

·         Demographics (discounted as the reason in comparison with other countries)

·         Health care professionals get paid grossly more than comparable professionals in other countries.

·         Administrative costs comprise about 32% of the total cost.

A more comprehensive list, which is useful in analyzing various police approaches was published by the Institute of Medicine, Best Care at Lower Cost (2013), Table 3.1

Sources of Estimate Excess Costs, U.S., 2009

                                                                   $Billion

·         Unnecessary services                          210

·         Inefficiently delivered care                 130

·         Excess administrative costs                190

·         Excessively high prices                       105

·         Missed prevention opportunities          55

·         Fraud                                                     75

765

An Overview of the Economics of the U.S. Healthcare Industry

The base of our healthcare system is a fee for service model, with most people having health insurance of some kind. This model encourages health service providers to prescribe more services, test, etc. to maximize service provider revenue. With the patients paying only the deductibles and co-insurance (with an out-of-pocket maximum), there is little incentive to minimize the total cost of the services received. Patients have little incentive to limit the number of procedures, visits or even physicians, so utilization per patient has increased.

 Millions of employees obtain their health insurance through their employer, so the employees rarely consider the insurance cost a cost of their health care. Health insurance premiums that employers pay are deductible expenses for the employers. Third party coverage to pay medical bills inevitably encourages at least some wasteful spending. It's a simple fact of life that people spend their own money more prudently than other people's money

On top of that private health insurance system are the government Medicare and Medicaid program, using the same fee for service model. Medicare Advantage provides an alternative HMO model to the standard Medicare program, but only about a third of those eligible choose Medicare Advantage, and even some of those choose the PPO model (which is an option in many areas, especially in rural areas) instead.

All of these elements of the healthcare system are privately owned, and the providers are paid through a very complex claims administration system. Health Savings Accounts were authorized by Congress in an attempt to make the patients’ choices more based on value for dollars spent, with the hopes that people spending their own money would make better choices. However, the prices the patients pay vary greatly among the service providers, are essentially undecipherable for the patients, and with the differences in quality of service unknowable, and thus place the patient in no position to make knowledgeable decisions that economists assume in their “free market economics” optimal equilibrium models.  In addition, we have the Veterans Administration which owns VA hospitals and pays directly the employees and service providers directly.

Health Savings Accounts were authorized by Congress in an attempt to make the patients’ choices more based on value for dollars spent, with the hopes that people spending their own money would make better choices.

Conclusions:

• The fee for service model and third the party payer system encourages wasteful spending.
• Health care in the U.S. is rationed, based on price and ability to pay, and thus by income or wealth class.
• We currently have a universal health care system, but multi-tiered, based on whether one qualifies for government programs which vary in coverage, private health insurance which varies in coverage, or whether one must rely on emergency rooms in hospitals.
• HSA’s       are most beneficial for higher income taxpayers and are therefore regressive.
• With the health insurance premiums paid by employers being tax deductible expenses, they are most valuable for higher income taxpayers and are therefore regressive.

Additional sources:

Why Are American Health Care Costs So High?

International Health Care Systems Healthcare Triage, Dr. Aaron E. Carroll