Officials measure health care costs in two major ways: total expenditures and per person (or per capita) spending. They report total expenditures either in dollars or as a percentage of the gross domestic product (GDP), or else as a growth rate percentage compared with the growth rate percentage of the GDP. Reports on per capita spending are often in dollars, in terms of total medical costs or total out-of-pocket costs, or as a percentage of individual income. A final means of measurement is the share of individual spending paid out-of-pocket. Total expenditures and per capita health costs can also be projected.
Estimating Health Care Costs
Total expenditures are growing at an alarming rate. In 2003, they were $1.7 trillion, with government projections to grow to $2.16 trillion in 2006 and over $4 trillion by 2015. Total health spending as a percentage of the GDP grew from 7.2 percent in 1965 to 16.2 percent in 2005, with projections to be 20 percent by 2015. Health expenditures are growing at a faster rate than is the overall economy. Projections are that health spending between 2006 and 2015 will grow annually by 7.2 percentage points while the GDP will grow annually only by 4.9 percentage points.
Per capita health care costs have also been increasing at a fast rate. In 2005, per person health spending was $7,110, up from $6,280 in 2004. Individual spending may increase to $12,320 by 2015. Out-of-pocket costs rose from $647 in 1999 to $788 in 2004, with projections to increase to $1,287 by 2015. Thirty-five percent of per capita spending is paid out-of-pocket.
Explaining Higher Health Care Costs
One of the major explanations for the increase in health care costs is the rise in the costs of providing services. Hospital care accounts for over 30 percent of national health expenditures. In 2003, hospital costs were $551 billion, and they are projected to increase to $1.01 trillion by 2014. Attempts to decrease or control hospital costs include improvements in the efficiency of administration and a reduction in the care done on an inpatient basis. As a result, other health care providers, such as those engaged in home health care, have seen a rise in their share of health care costs. Between 1990 and 2000, home health care, as a percentage of total health costs, rose from 1.8 percent to 2.5 percent. Nursing home expenses will also rise. Physician and clinical services make up 22 percent of total health expenditures, and these costs may more than double, from $370 billion in 2003 to $783 billion in 2014, because of increased demand for physicians, heightened specialization within the field, and the cost of malpractice insurance.
The emphasis on medical technology in the U.S. health care system also leads to an increase in costs. Expensive tests and highly advanced medical procedures are commonplace and sometimes done when not necessary. Examples of these procedures include invasive cardiology, organ transplantation, and imaging.
Prescription drug costs are another important contributor to rising health care costs. In 2004, they totaled $188.5 billion, but by 2015, expectations are that they will increase to $446.2 billion. The annual growth in prescription drug costs, at around 8 percent, is thus higher than the annual growth in hospital and physician costs. Advances in, and increased demand for, pharmaceutical research and technologies lead to greater medical costs, a trend expected to intensify in the future.
Demographic factors explain some of the rise in health care costs. The aging of the population will greatly impact the financial structure of the health care system. The 65+ population will increase from
13 percent in 2006 to 20 percent in 2030. This growth is caused by increases in life expectancy and the aging of the baby boom population, a cohort of 76 million born between 1946 and 1964. The 85+ population, the population in most need of health care, will more than double in numbers, from 4.2 million in 2000 to 8.9 million in 2030.
Finally, cultural factors play a role in rising medical costs. Lifestyle factors, like heavy tobacco and alcohol use, sedentary work and leisure behaviors, and unhealthy diets are linked to higher health care costs. Smoking and obesity are the two leading lifestyle factors associated with high health care costs. Unequal access to health care also explains growing health care costs. Individuals with insufficient or no health insurance coverage are less likely to seek medical care, especially preventative services. Thus, they are more likely to be treated for illnesses that could have been avoided.
Implications of Higher Health Care Costs
Health care costs are challenging the major payers, that is, the private and public health insurance systems. Private health insurance costs may well double, from $706 billion in 2005 to $1.39 trillion in 2015. Private health coverage companies responded to these increasing costs by implementing several new strategies. Most of these shifted more of the responsibility to their patients and providers. They changed their management of high-cost patients; introduced wellness, disease management, and medical technology information programs; reduced payments to providers; and implemented higher cost sharing.
Public health insurance costs will also rise, from $914.6 billion in 2005 to $1.93 trillion in 2015. Several attempts at curbing these costs slowed but did not stop the spending growth. Reform of Medicare (a federal program for those over the age of 65, certain disabled people under age 65, and those with permanent kidney failure treated with dialysis or a transplant) slowed some of the growth by cutting back payments to providers and shifting enrollees to managed care, both of which restricted benefits. However, the addition of a drug benefit in 2006 increased Medicare costs. Medicaid, a state-funded health program for the poor, greatly burdens the states, and states may respond by further restricting eligibility.
With this current climate of curbing costs, individuals must accept more and more of the financial burdens of the health care system. Two thirds of insured adults reported that their insurance premiums increased in the past 5 years. Copayments and deductibles are also rising for the majority of insured people, and for many individuals, high medical costs can have a huge impact on their lives.
Not only are rising medical costs a major stressor; they can also create significant barriers to health care. In the past year, almost one quarter of Americans had problems paying health care bills. Most of the unpaid bills were for physician services, lab fees, and prescription drugs. In a given year, almost 30 percent of adults report that they or a member of their household skipped medical treatment or either did not complete or cut the dosage of a drug prescription because of high costs. Individuals in disadvantaged social positions experience even greater access problems because of rising costs. Poor people, women, and individuals with chronic illnesses all report delaying or not getting necessary health care because of costs.
- Administration on Aging. 2005. “A Profile of Older Americans: 2005.” Washington, DC: Administration on Aging. Retrieved March 24, 2017 ().
- Centers for Medicare and Medicaid Services. 2007. “National Health Expenditures Projections: 2006-2016.” Washington, DC: Centers for Medicare and Medicaid Services.
- Heffler, Stephen, Sheila Smith, Sean Keehan, Christine Borger, M. Kent Clemens, and Christopher Truffer. 2005. “U.S. Health Spending Projections for 2004-2014.” Health Affairs Web Exclusive, February 23.
- Kaiser Family Foundation. 2005. “Health Care Costs Survey.” Washington, DC: Kaiser Family Foundation. Retrieved March 24, 2017 ().
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