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

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.

VIDEO: President claims health insurance industry puts profits before patient care.Play
Obama's Closing Argument on Health Care

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."

VIDEO: President Obama calls for up or down vote on health care reform.Play

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.

VIDEO: The president says "we have to act now" to hold insurance companies accountable.Play

Here are some of the drivers of cost increases:

Medical Technology:

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.

VIDEO: Senate Minority Leader Mitch McConnell on the hang-ups of health care reform.Play

"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."

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.

"Something needs to be done to help the health insurance market to work better and that's a really key issue and exchanges are intended to do," Guterman said. "If they work well, they can be very effective. As we're seeing in Massachusetts, it can be done."

Wilensky argues that the government needs to fix the way physicians are paid under Medicare and that there needs to be a more coherent system where they don't have to bill for various items under different codes, even if it's for the same patient.

"I am especially frustrated that so little attention is given at how physicians are paid at Medicare," she said, adding that it's "not a small sum of money."

Disease and Aging


There is no question that obesity has risen at an alarming rate in the United States. One-third of all adults fell in the obese category in 2007-2008, according the Centers for Disease Control and Prevention.

"We have issues relating to our lifestyle in terms of sedentary behavior, substantial increase in obesity etc. that also feeds into the demand for increasingly complex services and it's why tackling these issues is not easy," Wilensky said.

At the same time, as the baby boomer generation retires, there is increasing pressure on the cost structure to treat ailments.

Health care costs for chronic disease treatment account for 75 percent of national health expenditures, according to Kaiser.

Medical Malpratice

One of the biggest complaints that Republicans have put forward is that the Democrats' and Obama's bills do not include any provisions for medical malpractice overhaul, which they argue is one of the biggest cost drivers.

It is true that medical malpractice costs are rising and physicians need to factor those costs into their patient fees to protect themselves. The Congressional Budget Office estimated that medical liability insurance premiums for all physicians across the country increased an average of 15 percent between 2000 and 2002. But there is heavy debate about how much it really impacts the bottom line. The CBO estimated that medical malpractice costs account for less than 2 percent of the national health spending.

Prescription Drugs:

According to Kaiser, hospital care accounted for 31 percent of national health expenditure in 2008, with physician and clinical services trailing at 21 percent. Compared to that, the cost of prescription drugs is less -- it only accounted for 10 percent of national spending -- but the alarming sign is that it is one of the fastest growing spending programs.

Since Medicare Part D was implemented in 2006, government costs have shot up significantly, with funding for prescription drugs for Medicare beneficiaries shifting from the private to the public sector.

It has also become a political hot-button issue. Republicans do not want to see any changes to the Medicare Part D plan, a federal program launched in 2006 to provide prescription drug benefits to Medicare beneficiaries. Democrats say they want to close the doughnut gap in the program. When Medicare beneficiaries on the plan reach a certain ceiling, they have to pay the difference for their prescriptions out of pocket. Obama's plan seeks to give Medicare beneficiaries a rebate of $250 to those who reach the coverage gap in 2010.

Some critics of the current health care bills say that while it's true prescription drug coverage is rising, the government needs to tackle the size of hospital and physicians' bills first because those costs are higher.

"I think there is potential for putting even greater pressure on pricing and pharmaceuticals," Wilensky said. "I'm skeptical that that is the biggest place we can look to for savings. I am much more interested in what goes on in physicians and hospitals because that's where the money is."