Why are Health Care Costs High?

Jim Barfield
President CEO and co-owner of Luke & Associates, Inc.

The rise in the cost and affordability of health care in the U.S. continues to be a concern. In 2010, 18 percent of the U.S. economy was devoted to health care. The U.S. spent $8,402 per person on health care. Half of all spending was used to treat 5 percent of the population.  Approximately 22 percent of all spending was used to treat 1 percent of the population – those with expenses above $51,951. Adults 65 and older experience the highest health care spending -$9,744 per person in 2009.

Impacts of the Patient Protection and Affordable Care Act (ACA)
The Patient Protection and Affordable Care Act (ACA) was signed into law in March 2010 and upheld by the Supreme Court in July 2012. The ACA is intended to reduce the number of uninsured and reduce the overall costs of health care. It provides incentives—subsidies, tax credits and fees—to employers and individuals to increase the number of people covered by insurance.

The law also includes a number of other elements intended to improve health care outcomes and streamline health care delivery. It requires insurance companies to cover all applicants and offer the same rates regardless of pre-existing conditions or gender.

The ACA will require significant government-provided financial assistance to low- and middle-income people so they can afford health insurance and share the costs. It establishes standards for private health insurance, consisting of the minimum benefits for health insurance, cost sharing limits on benefits and rules to provide access to people with pre-existing health conditions without increasing premium costs. As a result, the cost of insurance coverage will be significantly reduced for many people with lower-income or pre-existing health care needs and will be required for everyone.

The cost of health care insurance is much different than the cost of health care
It’s important to understand that the price we pay for health care, either out-of-pocket or through insurance, is not the actual cost. It is the price our insurance companies are billed and includes the providers’ costs for labor, overhead, general and administrative costs and profit. Even non-profit providers put additional charges for reserves instead of profit.

And prices can vary for the same procedures. An article in the August 27 edition of the Wall Street Journal discusses these inconsistencies. Here is one example:

“After David Hubbard underwent a routine echocardiogram at his cardiologist’s office last year, he was surprised to learn that the heart scan cost his insurer $1,605. That was more than four times the $373 it paid when the 61-year-old optometrist from Reno, Nevada had the same procedure at the same office just six months earlier,” the journal reported.

In this case, Dr. Hubbard’s cardiologist’s practice had been bought by a local hospital system. Did the purchase of the practice truly justify an increase in the price billed which is four times the price for the same procedure performed in the same office and by the same people only six months earlier?

What are the reasons for high costs?
The Henry J. Kaiser Family Foundation report, “Health Care Costs: A Primer,” published in May, attempts to explain the continued high cost of health care. It reports that one of the reasons is due to the continued improvements and new technology. Another reason is our aging population and the prevalence of chronic diseases (diabetes, hypertension, etc.).

Another reason for high costs, according to the report, is the fact that insurance coverage has increased, and will continue to increase as a result of the ACA. Government subsidies will impact cost levels and cost growth. Tax subsidies for health insurance and public coverage reduce the cost of health care to the individuals, which encourages them to use more of it.

The report also explains that we pay a lower share of our health care expenses than we previously did. Between 1970 and 2010, the share of personal health care expenses paid directly by consumers dropped from 40 percent to 14 percent.

The last reason cited by the report is unnecessary spending. In fact, an article in the Journal of the American Medical Association, published March 14, states that 20 percent or more of all health care expenditures are due to various forms of waste, including overtreatment, failures of care coordination, failures of care delivery, administrative complexity, pricing failures and fraud and abuse.

Will the ACA reduce health care costs?
In my opinion, not likely. Despite the cost-reducing provisions in the ACA, system-wide health care costs are still projected to rise faster than the national income for the foreseeable future. There will also be a major increase in the use of the health care system because of increased health care insurance coverage.

The patient is not the customer — the insurance companies become the true paying customer. The way our system works now, there is no incentive for providers to reduce the price to the consumer since insurance companies pay the bill. There is no incentive for competition. The patient does not have an incentive to seek out more reasonable prices without compromising quality. The only exception is when the patient will have to pay large out-of-pocket expenses.

 

The price of individual health care must be paid by someone. It is not free. The ACA requires each individual to carry health insurance. If they cannot afford to pay for it, the government will. The cost of health care is now going up because of the increase in taxes necessary for the government to implement and administer the ACA. Who pays the taxes? We do.

Will Dr. Hubbard receive his next echocardiogram at the original price of $373 six months ago or the new price of $1,605? I expect it to be much higher.

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