Economics of Health Care:
Understanding Health Care Cost Drivers
While 83 percent of American adults utilize health insurance,1 few stop to consider that their prescription drug or office visit copayments are only a small fraction of the total charges. Many people assume "it's covered." But that's not the whole story. Even if a person's copayments remain the same, the cost of health care services may continue to rise at a rapid rate. In fact, growth in medical care costs is projected to outpace inflation and increases in employee earnings. As health care costs continue to rise, Illinoisans are faced with increased health care premiums and out-of-pocket expenses.
What are some common drivers of health care costs?
Prescription drug spending is one of the fastest growing costs, followed closely by hospital care and physician services. Three main factors influence prescription drug costs—consumption, price fluctuations and drug types. Americans continue to use more prescription drugs to manage their health.
As billions of dollars are spent on promoting brand name drugs, both the cost and demand for these drugs continue to rise. Generic drugs (on average) are 20 percent less expensive than brand name drugs. 2
Our country is spending more on health care because we are consuming more health care services. This includes the overuse and misuse of health care, which is a major contributor to rising health care costs. For example, some people may visit the emergency room when an urgent care clinic or doctor's office visit could sufficiently meet their needs at a much lower cost.
Another significant cost driver is a result of doctors practicing defensive medicine. Over-testing patients is a precaution that many doctors take to protect themselves from malpractice lawsuits. Nearly three-quarters of U.S. doctors practice defensive medicine at an annual estimated cost of $650 billion annually.3
Medical advances are another significant cost driver. While new technology can be life-saving, there is a cost involved in making such treatments available. In comparison to Canada, the United States has nearly three times as many CT scanners and four times as many MRI units per person.4 Both machines cost hundreds of thousands of dollars each.
Approximately 70 percent of all health care costs nationwide are directly related to personal behavior.5 In addition, nearly three-quarters of all costs can be traced to cardiovascular disease, cancer, diabetes and obesity. Each of these costly conditions are preventable much of the time.5
Unhealthy behaviors can result in costly chronic conditions. For example, while smoking is harmful to the user, children also can become asthmatic from being around an adult's secondhand smoke. Research shows that people with chronic conditions generally use more health care services, which include doctor visits, hospital care and prescription drugs. Insurance works by spreading costs across the sick and healthy—so an individual's chronic condition affects everyone's health insurance premiums.
Each year, thousands of Illinoisans rush to emergency rooms to receive treatment for preventable injuries. For children and adolescents alone, medical costs for preventable injuries in the U.S. are $17 billion annually.6 Simple actions—such as buckling seatbelts and consistently using bicycle helmets can help prevent injuries and reduce costs for everyone.
It's probably no surprise that health care fraud is a key driver of rising health care costs. Approximately 3 percent of all health care spending—or $68 billion annually—is lost to health care fraud.7
The health care industry also is experiencing displaced costs. Private insurers' payments to health care providers have traditionally increased since 1999, while Medicare's payments have decreased over this same time.8 In Illinois, Medicare, Medicaid and other government programs comprise more than 50 percent of the market. BCBSIL on average pays hospitals 6 percent more than their cost of care, while Medicare and Medicaid pay 10 percent and 15 percent to 20 percent less, respectively. As a result, providers shift costs to private payers to cover the difference.
Approximately 46.3 million Americans do not have health insurance9, and this growing number contributes to the increasing cost of health care for everyone. It is not unusual for people without health insurance coverage to wait to seek medical care. This can complicate a simple health problem, making it more costly to treat. In addition, people without health insurance coverage often seek treatment for non-emergency ailments in the emergency room—an expensive alternative to visiting the doctor's office.
Another challenge to affordable health care coverage is maintaining a balance between relatively healthy people and those who experience more health issues. The sustainability of health insurance coverage is based on having a variety of people in a collective pool—both healthy and unhealthy— to share the risk of the group.
The Future of Health Care
After looking at the many factors that influence health care costs, it becomes clear that controlling health care costs will take a lot of effort from all stakeholders—health insurers, health care providers, the government and consumers. In future issues of Economics of Health Care, we will look at ways we can all be a part of the solution.
For more detailed information, download Economics of Health Care: Understanding health care cost drivers.
- Gallup, Inc. About One in Six U.S. Adults Are Without Health Insurance. July 22, 2009.
- Kaiser Family Foundation. Prescription Drug Trends. May 2010.
- MedPage Today, LLC. Unnecessary Tests Drive Up Cost of Healthcare. February 22, 2010.
- Organisation for Economic Co-Operation and Development. OECD Health Data 2009, November 2009.
- The Wall Street Journal. How Safeway Is Cutting Health-Care Costs? June 12, 2009.
- Centers for Disease Control and Prevention. Childhood Injury Report: Patterns of Unintentional Injuries Among 0-19 Year Olds in the United States, 2000-2006. 2008.
- National Health Care Anti-Fraud Association. The Problem of Health Care Fraud.
- Blue Cross and Blue Shield Association. Health Care Trends in America. 2010 Edition.
- "Current Population Survey, Annual Social and Economic Supplement, 2009" (Sept. 2009)