US Healthcare Spending—Rising Fast

U.S. healthcare expenditures greatly exceed spending levels in other developed countries. They are projected to increase at a substantial rate, but produce no better—and indeed sometimes worse—outcomes, according to research sponsored by the Peter G. Peterson Foundation.

With national healthcare expenditure (NHE) estimated to reach $6.2 trillion by 2028, public policy experts, government officials, healthcare-sector leaders, business executives and ordinary citizens share mounting concern about the country’s ability to provide healthcare services that are fiscally responsible and attain acceptable levels of quality, effectiveness, and equity.2

Pandemic Reveals Systemic Problems

COVID-19 has altered the patterns and distributions of healthcare services and expenditures, at least for 2020 and 2021. It has spotlighted systemic deficiencies and inequities existing long before the pandemic and continuing throughout and probably thereafter. The pandemic and the development of vaccines have confirmed the importance of investment in basic scientific research. It has advanced innovation, particularly in the provision and distribution of services through telehealth expansion, retail clinic and urgent care utilization and outreach to rural and underserved communities through mobile heath units. Recognizing the widespread acceptance of telehealth, Walmart has purchased a telehealth provider and plans to expand its service nationwide.5

The pandemic also has revealed substantial weaknesses in crisis preparedness; inadequate and inequitable supply, facility, and professional resources; and insufficient coordination and communication capability.  At the very time that policymakers are compelled to address the rising cost of healthcare, the pandemic is requiring them to face long latent, systemic inadequacies along with the continuing internal and external causes of increasing healthcare expenditures.6

Experts look at healthcare costs both in terms of national healthcare expenditure (NHE)—which includes the costs at every level—and federal-government health spending. Here’s how both are rising.

National health costs and the GDP

Healthcare payers, providers, and patients consider the mounting cost of U.S. healthcare and its increasing demands on the American economy unsustainable. The Centers for Medicare and Medicaid Services (CMS) annually produce yearly NHE estimates and 10-year national healthcare expenditure projections reflecting total nationwide costs. These comprehensive, national statistics pertain to total U.S. spending, and thus include spending by federal, state, and local governments, households, and employers. In 2019—the most recent year with full, 12-month statistics—NHE grew 4.6% to $3.9 trillion, an amount representing 17.7% of the gross domestic product (GDP). Spending per person was $11,582.7

Current levels of U.S. healthcare spending—both on a per-person basis and as a share of GDP—far exceed those of comparable countries.8 The country with the second highest expenditure per person was Switzerland, with a 2019 per capita cost of approximately $11,000 and total healthcare spending constituting 12.1% share of GDP.  The United Kingdom spends approximately 10.3% of GDP, averaging $4,653 per person. The average per-capita expenses for the wealthy OECD countries, other than the U.S., was $5,500.9

A number of factors contribute to the higher cost of U.S. healthcare. Generally, healthcare prices are higher in the U.S. for professional services, hospitalizations and medical supplies and drugs. Higher administrative costs in the U.S., accounting for one-quarter to one-third of all U.S. healthcare spending,10 are estimated at $937 per capita compared to $284 in Switzerland, $80 in the United Kingdom, and an OECD average of $173, also raise the total spending figure.9 As of 2019, the OECD had a total of 37 member countries. At least one more joined in 2020.11

Health spending by the federal government

In addition to reporting NHE, CMS also estimates the subset of expenditures that comprises federal healthcare spending. In 2019, the federal government was responsible for 29% of NHE. The rest of NHE was divided among households, which accounted for 28.4%; private business, 19.1%; state and local governments, 16.1%; and other private revenue sources, 7.5%.  Total federal government expenditures include Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), Affordable Care Act (ACA) Marketplace premium subsidies, the Veterans Administration, U.S. Department of Defense healthcare programs, support for healthcare professionals and hospitals providing uncompensated care, as well as other federal programs.

Medicare represented 21% of total NHE in 2019; it accounted for the largest share of federal healthcare spending, a total of $799.4 billion. CMS projects that Medicare spending will grow 7.6% annually between 2019 and 2029. Medicaid accounted for $613.5 billion, 16% of NHE in 2019. That same year, private health insurance spending amounted to $1,195.1 billion, 31% of NHE, and out-of-pocket expenditures were $406.5 billion, 11% of NHE. From 2018 to 2019, spending for hospitals increased 6.2% while prescription-drug spending rose 5.7% and spending for physician and clinical services grew 4.6%. CMS has projected the average annual rate of growth for NHE during the period 2019-2028 at 5.4%.12

US Health Outcomes Lag Behind Other Countries

Despite Americans spending significantly more on healthcare compared to the residents of other developed countries, they do not enjoy better outcomes. In fact, the U.S. lags behind other countries when common health metrics are considered.13 Individuals born in 2019 in OECD countries have an average life expectancy of 80.7 years. Among the wealthier European countries, for example, the life expectancy for individuals born in 2019 in Switzerland is 83.8 years; in France is 82.8 years; in the United Kingdom, 81.3 years. The life expectancy for U.S. residents at 78.7 years trails even the OED average.14

National Health Expense: Ever Higher

NHE has increased annually for almost 60 years.15  CMS projects that U.S. healthcare spending will grow at rate 1.1% faster than annual GDP and is expected to increase from 17.7% of GDP in 2019 to 19.7% by 2028. Some of the reasons: health-sector wages are anticipated to increase faster than GDP and the prices for medical goods and services are projected to grow an average of 2.4% annually by 2028.  With the aging baby boom generation, the “pig in the python”16 greatly increasing Medicare enrollment, Medicare spending is expected to grow 7.6% annually over the decade. Spending on all categories of healthcare expenditures is expected to grow faster between 2019 and 2028 than in earlier years.

Even with overall growth, some trends with cost-reduction potential were underway before the COVID-19 pandemic. Increasingly, Americans were seeking healthcare services in places other than traditional professional offices, emergency rooms and hospitals. As health systems diversified their service locations beyond hospital facilities—and insurers directed plan members to lower-cost places of service—the number and utilization of ambulatory surgery centers, urgent care facilities and retail clinics grew.17

The use of telehealth services, both video and telephonic, which was significant even before the pandemic, became many times greater once “social distancing” was imperative. Given telehealth’s convenience for providers and patients—and especially its advantages for remote and underserved communities—its usage likely will expand. Although professional fee schedules for telehealth so far seem unlikely to vary from ‘in-office’ fees, telehealth may reduce medical-facility costs for providers. Walmart’s and Amazon’s investments to add telehealth operations to their consumer healthcare offerings confirm expectations for this mode of care.18

Causes of Higher Spending

Studies of healthcare spending tend to focus on factors internal to the healthcare sector that contribute to higher costs—in particular, prices and administrative costs.19 Even though changes in these areas would be opposed by powerful interests, significant cost-savings are imaginable, even if not easy.  Less amenable to change are external conditions that increase costs but cannot be avoided, including basic economic principles and demographics.

External cost factors: basic economics and demographics

CMS’s estimates, and other projections of future increases in U.S. health spending assume that the current structure of the healthcare sector generally will continue; these projections also take into account external developments that impact costs. Although academic, political, and industry sources are currently generating many proposals for cost-savings—including significant structural changes—the prospect for substantial change is uncertain. Certain externalities, particularly demographics, will challenge cost-containment efforts.

Supply and Demand. Healthcare spending is subject to the basic economic principles of supply and demand. As the population grows and more individuals enjoy better access to care because of such developments as the Affordable Care Act markets, increased Medicare enrollment, and expanded Medicaid and other government programs in some states, expenditures will rise. What’s more, limitations on current and future supply, particularly with respect to the education and licensing of medical professionals, may result in unmet demand that could easily lead to rising prices.20 In addition, the increase in the production of expensive drugs protected by patents also will cause spending increases, unless cost-containment measures, probably requiring legislation, are adopted.21

Baby Boomers and the Larger Insured Population. Demographics constitute a significant contributor to the rapid ascent of healthcare costs and will have substantial, immediate impact. As increasing numbers of the baby boom population born between 1946 and 1964 reach Medicare age, that program is projected to experience the highest rate of spending growth among healthcare payers—7.6%, between 2019 and 2028. Based on the distribution of births between 1946 and 1964, the peak year for new Medicare enrollment likely will be 2022, 65 years after 1957, the year the greatest number of boomers were born.22

As of 2019, 10,000 baby boomers were aging into the program every day.23 MedPAC has estimated that Medicare enrollment will reach 80 million by 2030. And as years pass, the
Medicare program will have an increasing number of older—and, thus, more expensive—beneficiaries.24

With per-person healthcare expenditures for individuals age 65 and older estimated at five times the spending per child and almost three times the amount per working-age person, the impact of the older cohort is obvious. In 2019, the average Medicare expenditure per enrollee was $13,276, while overall the national average per-person spending was $11,582. Private insurers, which generally pay higher fees than Medicare but whose enrollees typically are younger and less expensive than the Medicare population, spent $5,927 per person in 2019. Medicaid, which covers individuals at all ages, spent an average of $8,485 per person.2

During periods of increased enrollment in private insurance and public programs, healthcare costs generally can be expected to increase as more people take advantage of their coverage. Assuming enrollees continue their insurance coverage indefinitely and preventive care reduces the severity and cost of later healthcare needs, individual healthcare costs may decline. However, longer-term savings may not be realized because of termination of insurance coverage, for example, when job loss ends employer coverage or individuals lose government benefits. In addition, high deductibles and copays may discourage the use of covered services by lower-income enrollees and limit
their access to long-term and continuing coverage, thereby preventing comprehensive care.25

Internal factors: prices, administration and anticompetitive trends

Factors internal to the healthcare system also affect the rise in prices.

Prices and administrative costs. Analyses of increasing healthcare spending generally cite prices as the leading cause. In particular, they emphasize trends in pricing for professional and facility services, prescription drugs, and durable medical equipment (DME).26

More detailed studies also acknowledge the significant role of administrative costs, which like prices, are higher in the U.S. than in other developed countries. These studies often emphasize that the administrative costs for private insurance substantially exceed the costs for Medicare administration.27

The comparative complexity of the U.S. health system—with its mix of government programs, private insurance, and uninsured individuals—entails varied and duplicative administrative requirements that add measurably to expenditures. These include expenses incurred by physicians’ practices for billing, obtaining pre-approval for services, and record-keeping required by multiple payers whose enrollment, coverage, patient benefits, authorization, payment, and other standards can vary greatly. Already in 2009, these expenses have been estimated to add $23 billion to $31 billion to the cost of healthcare.28

Insurers and plan managers incur their own administrative costs. Employers and other plan sponsors bear consulting, broker, and administrative expenses for their employee health plans. Although government programs generally spend less on administration than do private health plans—and pay providers lower fees—the scale of federal and state programs adds significantly to overall national expenditures.

Anticompetitive trends. The impact of greater consolidation in the healthcare sector, both vertical and horizontal, has raised concerns about adverse effects on competition and potential increases in consumer costs.29 Investment funds increasingly see the healthcare sector as an attractive investment opportunity and are viewed as influencing rising prices.30 Private equity has a growing presence in the health sector, as firms invest in pharma, biotech, technical equipment, facilities from nursing homes to surgery centers, and professional provider groups, including ER, anesthesiology and other specialist practices serving hospitals.31

Doctors and hospitals view insurer consolidation as anticompetitive32 and are challenging companies for lowering fee schedules and forcing provider groups and hospitals out-of-network.33 Public officials have criticized mergers of provider organizations; insurance company acquisitions of professional provider groups, pharmacy benefit managers, and healthcare-related analytic and consulting organizations.34

In January 2021, as litigation and regulatory actions challenged insurer mergers and business practices, government officials reacted. The Congress passed by a bipartisan voice vote in the House and unanimous consent in the Senate, and the president signed, a new law repealing a long-standing federal antitrust exemption for medical and dental insurers. Thus, federal authorities, as well as state regulators, can now investigate antitrust issues in the health insurance industry.35

The Bottom Line

Both the Biden Administration and the Congress that came into office in 2021 recognize the need to address widely held concerns about the cost of healthcare in the United States.  With the Covid-19 pandemic having exposed critical weaknesses in the health sector, officials are challenged not only to contain costs but to develop policies that also assure equitable access to quality healthcare.

This article was originally published on Investopedia.com on June 8, 2021.
Written by: Michelle P. Scott

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