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

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."

Administrative Costs:

Experts say by curtailing administrative costs and making the system more efficient, the government can significantly help reduce health care costs. Inefficiencies in the current system account for much of the cost structure.

The current system suffers from a lack of coordination, there are multiple billing systems for one insurer that adds layers of complexity to the process.

Claxton said what could have long-term impact is encouraging bundled payments and moving toward an evidence-based system, so that physicians get paid more on the value they produce than on the number of tests or examinations they order.

"Those things will take a while to put in place, but they are really the future of making health system work," he said.

Some experts also say the fee-for-service payment system needs to be abolished.

"We're rewarding in our health care system the production of more complicated services and more expensive services but we don't reward at least anywhere near the extent high quality, effective appropriate service care for patients," Guterman said. "The fee service system -- paying for piecework -- doesn't encourage treating the patient as a whole nor does it encourage providers working together to address the patients health as opposed to what they came in for."

Claxton said that the health insurance exchange system in Obama's health care bill, in which people will be able to shop for coverage, will save on search expenses and help reduce administrative costs. Proponents of the bill say it will help streamline efforts and reduce inefficiencies.

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