Why U.S. health care costs continue to rise
Health care is becoming increasingly unaffordable. In the last year, the costs of public health insurance rose at nearly double the rate of inflation, and private health insurance at roughly triple the rate. Next year, employer-sponsored health insurance premiums are expected to jump by more than 8%. The upshot? More people are feeling the financial squeeze—even to the point of foregoing medical appointments and treatments. “A lot of people are struggling,” said Anna Sinaiko, associate professor of health economics and policy at Harvard T.H. Chan School of Public Health. “It’s a tough time for those who are uninsured or losing Medicaid coverage, but also for those who are insured through their employer. It’s everyone.”
What’s causing health care costs to increase so steeply, and how new or uncommon a phenomenon is this rise? Sinaiko explains below.
Q: How much have we seen health care costs go up recently—and how unusual are these increases?
A: Everything gets a little more expensive each year, even if you’re buying the exact same things, due to inflation. Health care is no different. We expect to see health care costs increase year after year. What we focus on, then, is the pace of these increases. Are health care costs growing as fast as inflation, or faster? Are they on track with national economic growth—measured through gross domestic product (GDP)—or outpacing it?
Over the last 30 years, U.S. health care costs have grown faster than inflation and, until 2020, the GDP. This growth vacillates over time—the first decade of the 2000s was a period of very high health care cost growth, then health care cost growth slowed in the 2010s. Now, since coming out of the COVID-19 pandemic, we’re seeing growth rates increase again. Compared to inflation, which for the past two years has hovered around 3%, health care spending has been growing at over 7% over the same period.
Q: What factors are driving up health care costs?
A: There are several factors. Inflation is a contributor, as there was very high inflation immediately post-COVID, which has driven up labor costs and made the tools and equipment needed to provide health care—gauze, gowns, saline bags—more expensive. But this is likely playing a small role in cost growth. A really important contributor, we’re recently learning, is increasing intensity of care—in other words, more complex care is being used to treat patients. Some of this is from innovation in health care and the availability of cutting-edge treatments. New drugs like GLP-1s and CAR T-cell therapy are life-changing, life-saving—and very expensive. We want these medications out there to help patients, but they are certainly driving up costs per patient. We’re also seeing increased use of existing treatments and health care technology. For example, a recent study looked at numbers of knee replacements. While the number of these surgeries provoked by an injury or accident has stayed flat, the number of elective procedures continues to go up. Health care is getting more intensive—we’re doing more to more people—which makes it more expensive.
Q: When does intensive health care stop being a good thing and start being a money waster?
A: It’s hard to know. On one hand, you can view the increase in services as evidence of our health care system getting better. We’re identifying more people with illnesses and chronic diseases and getting them into treatment—often new and improved ones—sooner. That can be a good thing for patients. On the other hand, do people really need all the extra treatment they’re getting? Do they need as much monitoring as they’re getting? The value of some additional care might be quite low. In addition, some of the additional spending is a result of what we call ‘upcoding’—when a health system documents higher levels of complexity and increasing numbers of diagnoses per patient because it then increases their insurance reimbursements. This leads to higher spending without doing anything differently, and is more problematic.
Q: Given the amount of spending on health care in the U.S., are outcomes improving?
A: Data suggests that they’re not—that our spending on health care per person per year is much higher than in our peer nations, and our health outcomes are worse. I will say, however, that data on health outcomes at the country-level are averages, and there’s a high degree of inequality in the U.S. Many people receive high-quality care from great providers in excellent health systems, with very positive health outcomes. Others are not having that experience. So when you average those, you get a picture of a lackluster health care system, one that begs the question: Why are we spending so much—approaching 20% of our GDP—on health care if the outcomes aren’t stellar across the board?
Q: What are some changes that could help drive U.S. health care spending down without compromising on quality?
A: This is the policy question. Some states are focusing on health care prices, and have passed legislation to set ceilings for the prices paid to hospitals. Often this applies only to state employee health plans and not the whole commercial market, but it’s a start and should reduce some spending. There’s also proposed policy to change the way we pay for medical care across different sites of care. Right now, we pay higher prices for care in hospitals and hospital outpatient departments than we do for the same care in other settings. If we could pay the same payments across settings that would save some money; it would also decrease incentives for health system consolidation which is a contributor to high health care prices. Finally, another area we should be working on addressing is lowering administrative costs of providing health care and health insurance. Administrative costs are relatively high in the U.S. health care system, and reducing these costs might be easier to implement than changing processes of delivering care.
Learn more:
Americans facing ‘really tough decisions’ around rising health insurance costs (Harvard Chan School news)
Health insurance premiums are rising—here’s why (Harvard Chan School news)
