5 Reasons Why Healthcare Costs are Rising

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It’s no secret that the United States has the most expensive healthcare system in the world. According to a report from the American Medical Association, healthcare spending reached $3.6 trillion in 2018. The Centers for Medicare and Medicaid Services (CMS) estimate that national health expenditures will rise to $6.0 trillion by 2027.

But why is U.S. healthcare spending so high? Definitive Healthcare provides organizations with the ability to gain actionable insights into the drivers behind market trends. In this case, we identify five factors that contribute to rising healthcare costs. Our key data sets include payor mix, medical claims, and technology implementations. 

1. Aging population

The Baby Boomers, one of America’s largest adult generations, is approaching retirement age. Because of this, the 65 and older population is growing at an unprecedented rate. According to the U.S. Census Bureau, 21 percent of the entire population will be age 65 or older by 2030. Older Americans will make up almost one-quarter of the population by 2060.

This growth is likely to contribute to rising healthcare costs in two important ways:

  1. Growth in Medicare enrollment, and
  2. More complex, chronic conditions

At age 65, Americans become eligible to enroll in the Medicare federal health insurance program. In 2018, Medicare had almost 60 million beneficiaries. The total number of Medicare beneficiaries will dramatically increase in 2030. By then, all Baby Boomers will be age 65 or older.

Because Medicare is a publicly funded program, this enrollment growth will also impact national health expenditures. According to CMS, the U.S. spent $750.2 billion on Medicare in 2018. As a result of enrollment growth, CMS projects that Medicare spending will increase by 7.6 percent per year through 2028.

Payor mix is an important metric to track as Medicare enrollment grows. Payor mix refers to the share of patients with privately versus publicly funded insurance plans. Hospital payor mix will change as Medicare enrollment increases and more patients seek publicly funded insurance.

Payor mix is an important indicator of hospital revenue and financial performance. This metric may also be useful in identifying areas of dense elderly patient populations. 

On top of Medicare growth, chronic conditions are more prevalent among the elderly population. The National Council on Aging reports that 80 percent of older Americans have a chronic condition. Seventy-seven percent of older adults have two or more chronic conditions. The most common of these conditions include:

  • Hypertension
  • High cholesterol
  • Diabetes
  • Coronary heart disease, and
  • Alzheimer’s disease

Chronic conditions like these could lead to health complications that require ongoing treatment or intervention. Some elderly adults with a chronic condition might also need long-term care at a nursing home or assisted living facility (ALF). Either of these outcomes could contribute to rising healthcare costs and overall spending in the United States.

2. Chronic disease prevalence

Six out of every ten adults in the United States has a chronic disease or condition, according to the Centers for Disease Control and Prevention (CDC). The most common chronic conditions in the U.S. include:

We can identify diagnosis volumes and comorbidity information using Definitive Healthcare medical claims data.  Medical claims data is an important tool for understanding chronic disease prevalence in the United States. All-payor claims data can provide insight into comorbidities, common procedures, or areas with a high volume of specific chronic disease diagnoses.

Chronic conditions often require long-term medical attention. Some conditions may also limit daily living activities, which could warrant use of home health care or other support services. Some people also suffer from anxiety, depression, and other mood disorders due to the challenges of living with a chronic illness.

All these things make caring for chronic disease patients more complex and resource intensive. There is a strong relationship between healthcare costs and chronic diseases in the United States. According to a report from the Milken Institute, the U.S. spent $1.1 trillion in 2016 for the treatment of chronic health conditions.

Much of this healthcare spending goes toward services like routine office visits, prescriptions, outpatient treatments, or emergency care.

In addition, the COVID-19 pandemic has caused some chronic disease patients to delay or avoid essential care. This means that chronic disease patients are spending less on healthcare services in the short term. But this may ultimately have damaging health and financial effects in the long term.

When chronic disease patients delay care, they risk suffering from potentially life-threatening complications. Those who seek care in time are more likely to develop long-lasting side effects as a result. The long-term management of those side effects will likely contribute to rising national health expenditures and consumer costs.

3. Rising drug prices

According to the Organisation for Economic Cooperation and Development (OECD), the average American spent about $1,200 per year on prescription drugs in 2018. This per capita cost is significantly higher than other developed countries.

These costs could increase along with prescription drug spending. Prescription drug spending in the U.S. will grow by 6.1 percent each year through 2027, according to CMS estimates.

The spending growth is due in part to a continuing emphasis on specialty pharmaceuticals and precision medicine. Specialty drugs are often experimental therapies used to treat cancers, autoimmune diseases, or chronic conditions. Some therapies utilize genetic data to deliver a highly targeted, personalized treatment.

The complex nature of these drugs makes them very costly to develop and distribute. A new specialty drug called Zolgensma is the most expensive drug ever approved by the Food and Drug Administration (FDA). This gene therapy costs $2.1 million for a one-time treatment.

Only 58 healthcare providers have submitted a claim for Zolgensma between January and September 2020. But according to Definitive Healthcare claims data, the drug has already accounted for $26.4 million in total charges.

Drug pricing strategies also contribute to rising healthcare costs. Drug manufacturers establish a list price based on their product’s estimated value. Manufacturers can raise this list price as they see fit. In the United States, there are few regulations to prevent manufacturers from inflating drug prices in this way.

In September 2020, President Trump signed an executive order that would lower prescription drug costs for Medicare beneficiaries. The order would test a new payment model for Medicare Part B and Part D drugs. In the new model, the cost of these drugs would not exceed the price that drug manufacturers charge in other developed countries.

If passed, the order could significantly reduce federal drug spending. However, the order requires months of federal rulemaking. Because of this, it has limited immediate effect.

4. Healthcare service costs

Americans visit the doctor at half the rate of other developed countries, according to an analysis published by The Commonwealth Fund. But the U.S. also spends more on healthcare than any other country. How is this possible? The cost of healthcare services is significantly higher.

For instance, cesarean-sections (C-sections) are among the most common inpatient procedures (includes extraction of products of conception, open approach) in the United States. According to Definitive Healthcare data, the average cost of a c-section was $5,305 in 2019. This cost does not include other fees associated with medical interventions, complications, or an overnight hospital stay.

The United States has consistently higher procedure costs than other developed countries, according to a 2017 price report.

The report states that the average cost of a coronary artery bypass graft (CABG) surgery in the U.S. was $78,100 in 2017. In comparison, the same procedure cost only $11,700 in the Netherlands. The U.S. also reported higher costs for outpatient procedures like MRI scans or colonoscopies.

A 2018 JAMA study suggests that three key factors contribute to inflated healthcare prices in the United States:

  1. Physician salaries
  2. Administrative costs, and
  3. Prescription drug prices

The JAMA study found that physician salaries in the U.S. were higher than those in other countries. In 2016, a general physician made an average salary of $218,173 per year. According to the study, average physician salaries ranged from $86,607 to $154,126 in other countries.

Together with rising administrative costs and drug prices, these three factors contributed most to higher healthcare prices in the United States.

5. Administrative costs

According to a study published in the Annals of Internal Medicine, the U.S. spent $812 million on healthcare administration in 2017. This spending accounted for 34 percent of national health expenditures in 2017.

Why is administrative spending so high in the United States? The U.S. operates within a complex, multi-payor system. In a multi-payor system, healthcare costs are financed by many different payors. With so many stakeholders involved, healthcare administration becomes a complicated, inefficient process.

These inefficiencies contribute to excess administrative spending. The main component of excess administrative spending is billing and insurance related (BIR) costs. These are overhead costs related to medical billing, and include services like:

  • Claims submission
  • Claims reconciliation, and
  • Payment processing

Insurance company profits make up the largest share of BIR costs. Healthcare providers also receive part of these administrative costs for notetaking and record-keeping during the medical billing process.

According to a 2019 McKinsey & Company report, the U.S. could reduce administrative spending by 30 percent by automating and streamlining BIR processes. Technologies like claims processing software can help automate these processes. But according to Definitive Healthcare technology data, only 12.6 percent of U.S. hospitals use a claims processing software.

Automating certain aspects of claims processing can increase payor productivity and decrease costs.

Learn more

By identifying regions with high procedure costs, healthcare organizations can help implement cost-cutting measures in supply chain spending or other hospital expenses.

Originally published June 26, 2019

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