Why Health Care Costs Keep Rising: What You Need to Know

March 9, 2010— -- Republicans and Democrats may disagree on what a health care bill should include, but both parties agree that dramatically rising health care costs need to be contained.

The U.S. government spent more than $2.3 trillion on health care in 2008, more than three times the $714 billion spent in 1990, according to the Kaiser Family Foundation. In 2008, U.S. health care spending averaged $7,681 per person in 2008.

To put that into perspective, the United States spends twice as much on health care as it does on food, according to the McKinsey Global Institute, even though the prevalence of disease is relatively less than in comparable countries.

At the same time, for consumers, premiums continue to rise sharply. Since 1999, they have increased 131 percent for employer-sponsored health coverage, according to Kaiser. Stories of families facing unaffordable premium hikes can be found across the country.

"Health care costs are partly so high because they have been increasing rapidly," said Stuart Guterman, assistant vice president for the Commonwealth Fund's Program on Payment System Reform. "There's a long list of factors like technology and the organization of health care that doesn't promote efficient and effective care."

Despite President Obama's bipartisan health care summit last month, both parties continue to bicker about what should be included in a health care bill, with each side presenting its own argument on what specific health care costs should be contained.

Some experts argue that while the health care bill, as proposed by Obama and congressional Democrats, expands benefits and seeks to implement insurance reforms that would open up coverage to a wider scope of people, it does not address the core issues behind rising health care costs. Proponents of the legislation argue that it is a start and creates the foundation for sustainable changes in the long term.

Here are some of the drivers of cost increases:

Technology has helped advance the medical field by leaps and bounds, but it's also increased health care spending.

A report by the U.S. Centers for Disease Control and Prevention last month showed that the use of high-tech medical tests and surgeries escalated rapidly over the past decade, but experts are unsure whether that is always beneficial.

The medical and pharmaceutical industry often reimburses the cost of implementing new technology through its customers. At the same time, analysts say, consumers also tend to seek costlier treatments even if they are not cost-effective.

"We have a system that encourages more and more complex services to be provided, whether or not that is necessarily the best or most appropriate care, partly because of how we reimburse our physicians in the hospital," said Gail Wilensky, a senior fellow at Project HOPE, a non-partisan international health education foundation that is involved with humanitarian assistance. "We have an American public that is very used to having an open easy-access system to specialists in new technologies and easy availability for all that."

The focus, experts say, is not always on the quality of the treatment, which should be the case. Instead, the current system in many ways rewards those medical care providers who prescribe more tests and services than those who focus on quality.

What drives spending is that people use more services, and for many services such as outpatient services, there is no limit.

Outpatient care, which includes same-day hospital visits and accounts for $436 billion, is the largest and fastest-growing part of the U.S. health system, accounting for $436 billion, or two-third of total health care costs, according to McKinsey.

"In the long run, a lot of it has to do with the fact that we innovate and can do more things for more people and that's a cumulative thing. Sometimes people call it technology or innovation throughout the health care system," said Gary Claxton, vice president of the Kaiser Family Foundation. "We can treat people who you couldn't treat before. We can provide potentially more treatments... not all of these are money saving. They may be very good in terms of helping people but it builds costs."

At the same time, technology, if used effectively, can help cut costs. President Obama raised the issue of electronic records at the start of his presidency, which was met with some concern about privacy issues. But some experts say that the lack of such a system means there is no communication between doctors and hospitals and in turn not only results in less efficient care, but also higher costs for both the state and the consumer.

"If you've got a patient who has a heart attack somewhere and is unconscious and treating them appropriately right away is crucial in the patients survival... there's right now generally no way for the admitting hospital to know anything about the patient," Guterman said. "That's not only a cost issue... but also more importantly, it's a quality issue. It's a matter of the patients' health and chances of survival."