Why health care costs are rising

Direct medical costs make up the vast majority of Tennessee’s health care spending, including how your premium dollars are spent. Learn more about the factors driving up costs.

How much are we spending, and where does all the money go?

Each year, Americans spend more on health care than do residents of any other country.

In 2014, for every dollar we received in premiums and fees, we paid out 87 cents for medical care. That 87 cents on the dollar resulted in billons paid to doctors, hospitals and drug companies.

We spent another 4 cents on federal, state and local taxes. We spent 8 cents of every dollar on quality initiatives, provider support, broker commissions, marketing, maintaining compliance standards, processing claims and other administrative costs. We retained 1 cent of every dollar, which went into our reserve fund – more than two-thirds of which is required by state law.

Here’s how the typical American health care dollar was spent: 1

Premium Dollar

What about your insurance premiums? From each premium dollar in 2012, we spent 86 cents on direct medical costs. What we spend on medical services, then, determines what you pay for coverage. (Learn more about how insurance and premiums work.)

Why are costs so high?

Heath care costs have reached a critical state. In 2010, the U.S. spent $8,233 per person on health care, by far the highest of any country in the world. The next highest, Norway, spent $5,388 per person, and the United Kingdom less than half of the U.S. total. 2

U.S. spending on health care represented 17.6 percent of our nation’s gross domestic product, again dramatically higher than any other country. Over the last three years, the growth of health care spending has slowed. 3 That’s good, but it may be a result of lower use rather than a change in unit costs. Either way, spending is still going up.

Why are U.S. health care costs so high? Here are a few key reasons: 4

The delivery and payment system is inefficient.

Quantity versus quality
Traditionally, doctors and health care facilities are paid based on each visit or procedure they perform. It’s called “fee-for-service” and the unintended consequence is that it rewards giving more care rather than necessarily better care.

Under a fee-for-service model, the only ways to control spending are to cut reimbursements for those procedures or limit the number of health care procedures. The system’s incentives encourage just the opposite.

That’s not a sustainable way forward. So we’re testing programs all over Tennessee – including accountable care organizations and bundled or single payments – that are new ways of paying for care that promote quality over quantity.

Fragmented care
Nearly half of Americans live with at least one chronic condition that requires care from multiple doctors. The current system makes it difficult for one doctor to have a full picture of the patient’s health and treatments. As a result, providers must coordinate treatment of the patient very closely, otherwise the patient suffers and the system experiences overuse, misuse and duplication of procedures and other inefficiencies. When doctors treat one symptom at a time instead of looking at the patient holistically, health outcomes suffer and costs increase.

Unnecessary treatments and facility duplication
More isn’t necessarily better. According to the Institute of Medicine, the U.S. spends about $765 billion a year on wasteful health care, such as unnecessary medical tests and procedures.

The number of medical facilities is also growing as more facilities are opened that perform specialty and outpatient procedures. This funnels patients away from larger hospitals that provide high-cost emergency room services that often go unpaid. Hospitals then have fewer profitable procedures, leading them to increase the costs of services provided to other patients.

There are many hidden costs you don’t see.

Lack of cost transparency
If you’re like most people, you probably swipe your debit card for the copay at your doctor’s office without knowing the full cost of the visit. That’s how the system has worked for years. The drawback is that you don’t know the actual cost of the services you just received.

If you have a high-deductible plan, you may be getting used to the idea of managing your health care dollars by shopping for the most cost-effective care. It’s complicated, but we want to make it easier through Web-based cost and quality tools.

Cost shifting
Doctors often receive up to 30 percent less from Medicare and Medicaid for their services, compared to what private insurers pay. That means they may be losing money on some patients.

A study by Milliman, Inc., an actuarial firm, says this lost revenue is often passed along to private insurance customers, resulting in a “hidden tax” of around $1,788 for a privately insured family of four.

The uninsured or underinsured
The U.S. spends anywhere from $100 billion to $200 billion each year to treat uninsured patients. This cost is paid primarily by taxpayers and private entities, such as hospitals and other health care providers who consider it uncompensated care. It also covers treatments for preventable diseases, which doctors could have treated more effectively and efficiently if they’d been diagnosed sooner.

Defensive medicine
When health care professionals order tests out of fear of being sued for misdiagnosis or other malpractice, it drives up the cost of care. Defensive medicine costs tens of billions of dollars each year.

Our lifestyles are working against us.

Poor nutrition and lack of exercise
Our daily choices matter. They impact our quality of life, but they also impact our health care spending. Obesity and its complications led to an estimated $147 billion in medical costs in 2008. And it’s estimated that medical costs are more than $1,400 more per year for people suffering from obesity.

Tobacco use
Tobacco and secondhand smoke kill 450,000 people in the U.S. each year and sicken millions, costing $96 billion in direct health care spending, as well as an additional $97 billion in lost productivity.

Workplace stress
More than one-third of workers say they regularly experience job-related stress. One in five rate their stress level at 8, 9 or 10 on a 10-point scale. That stress can have real impacts on health – and the cost of health care.

New and emerging therapies are expensive and sometimes overused.

Technological advances enable many life-enhancing and lifesaving benefits, such as the widespread adoption of hip, heart and knee replacements. They allow for greater survival rates for premature babies and cancer patients, among countless other advantages. Unfortunately, the cost of technology is incredibly high.

In the U.S., we have one-third more CT scanners and two and a half times as many MRIs per person than the average in developed countries. While an X-ray machine costs about $175,000, a CT scanner costs $1 million and MRI machines up to $3 million. There is a built-in incentive for health care providers to prescribe MRIs when, many times, an X-ray might suffice.

Prescription drugs
Prescription medications can prevent and treat illness and improve quality of life. It is the fastest- growing component of care, thanks to the emergence of biologic medications. However, these medicines, produced from living organisms at an exorbitant expense, can cost patients and insurers between $20,000 and $200,000 per year.

Lack of awareness
While doctors have an increasing number of therapies available to them, there has not been a need on their part to know the costs of those therapies, in part because the costs are covered by private insurance and the patient/consumer doesn’t ask to know. It is estimated that about six out of 10 large hospitals don’t educate medical students on the cost of procedures.

Seven factors of higher costs
Kaiser Health News, in collaboration with PBS Newshour, reported on seven factors driving up your health care costs. Based on research from the Bipartisan Policy Center, Kaiser identified issues such as the fee-for-service payment model; an aging, increasingly unhealthy population; a desire for the latest drugs and technologies; a lack of transparency about treatment options and costs; and provider consolidation, which leads to leverage for higher prices. Read its full report.

Show 4 footnotes

  1. BlueCross BlueShield of Tennessee: How We Spend Premium Dollars
  2. PBS Newshour. Health Costs: How the U.S. Compares with Other Countries.
  3. The Henry J. Kaiser Family Foundation. Health Care Costs: A Primer.
  4. BlueCross BlueShield Association. The Cost Problem.