Healthcare in the United States: factors contributing to its increasing cost
The cost of healthcare in the United States is increasing. With costs increasing faster than inflation and growing at rates that approach 10% as compared to 2002, the nation is facing a healthcare crisis. Many factors are believed to have contributed to the overall rise in healthcare costs. Most of the issues can be identified and categorized into one or more of the following general categories: hospitals, physicians, prescription drugs, technology, labor shortage, and uninsurance. This study will endeavor to review those trends in healthcare and make recommendations as to which pose the greatest struggle for our national healthcare environment.
Critical thinkers from a wide variety of disciplines differ in opinion as to which factors have had the greatest impact to the overall rise in costs. As the debate continues almost everywhere in our nation, one fact remains: every individual needs healthcare. It doesn’t matter where you live or how much money you have. The costs must be paid by someone in order for the system to survive and for everyone to get the care they need when they need it. To make matters even more complex on the socioeconomic level, a fixed cost is a relative economic variable. Someone with $10,000 does not feel the cost of a $10 co-pay at a doctor’s office the same as a person with only $100. Issues such as this are representative of the concerns facing healthcare in the United States in the 21st century
BACKGROUND AND LITERATURE REVIEW
A study by the Johns Hopkins Bloomberg School of Public Health reports that healthcare expenditures in the United States are 44% higher than the per capita costs in Switzerland who has the next highest cost per capita. (Kohn, 2003) The study analyzed a myriad of other factors and found increases for the United States in almost every category, far outpacing other industrialized nations. Much of the research pointed to a singular conclusion that prices for healthcare in the United States are much higher than anywhere else. As economists would tell us, price is often driven by cost which is the major focus of this study.
The increased costs have their effects on consumers. A recent study cites a poll which indicated that “more Americans are worried about health care costs than about losing their job, paying their rent or mortgage, or being a victim of a terrorist attack.” (Strunk & Ginsburg, 2003, p.266) This helps to put into context the greater issues at hand and lends focus to the debate. Healthcare costs are definitely on the minds of the citizenry of the United States and solutions must be found. This general feeling is why healthcare related issues are now a top election issue at the national level.
Data presented in the study (FIGURE 1) suggest that there may be signs of relief in the growth rates of costs, but the rates are still very high. Spending for all healthcare services increased 9.6% for 2002, down from 10.0% in 2001. As long as these rates are remain at 3-4X the national inflation rate, the problem of healthcare costs will not be under control.
FACTORS CONTRIBUTING TO INCREASING HEALTHCARE COST IN THE U.S.
The first major factor to consider as a driver of healthcare costs is the hospital system in the United States. Hospitals are at the heart of the healthcare cost crisis. As the primary point of contact for all healthcare activities, hospitals must be able to handle almost everyone who walks through their doors. Within hospitals, emergency rooms contribute most of the costs that seem to be out of control.
Many hospitals have some sort of emergency room or urgent care center. For a growing portion of the population, these have become a primary care provider instead of a dedicated emergency response unit. When non-emergent cases frequent and eventually clog the emergency rooms (FIGURE 2), the quality of overall emergency care is greatly impacted. One of the most frequent complaints from healthcare consumers is that they are forced to wait too long in the emergency room. Because the limited staff and beds are already over utilized processing and disposing of non-emergent cases, waiting rooms fill up. Often a patient’s condition can worsen while sitting in the crowded waiting room. This is a major problem and must be addressed.
In urban areas, crime activity can fill even the highest capacity emergency rooms even before midnight. Gun shot wounds and knife stabbings from gang-related fights are some of the leading cost drivers in the urban emergent healthcare arena. With many state budgets facing huge levels of debt from the recent downturn in the national economy, cities are forced to go without critical subsidies for basic services such as police and fire department salaries. As a result of that trend, larger urban communities and their healthcare leaders are desperately trying to find creative solutions to stem the flow of crime-related medical emergencies.
Apart from the emergency rooms, hospitals in general have shown an alarming trend in the area of cost per patient day. According to data recently published by Blue Cross Blue Shield (FIGURE 3), an upward trend in inpatient spending has emerged. This is combined with a decrease in the average length of stay per patient (FIGURE 4). The combined effect could become very troublesome for hospitals as they try to meet all of their financial obligations.
Another major contributor to the rising costs in healthcare in the United States is the physicians. One would think that the doctors would never be to blame. They are the souls who work long hours and study even longer to become the lifesavers that our population so desperately needs. While that is true, they are also oftentimes unwilling participants in the rise in costs. As previously suggested, many state governments are in a budget crisis. One of the ways that several states have tried to cut costs is to lower Medicaid and Medicare payment rates to physicians according to a study published by the Journal of Contemporary Health Law and Policy, or JCHLP. The study further elucidates this problem by suggesting that increased upward pressure is put on rates that physicians charge to private payers like health insurance plans and individuals because of the cutbacks in state-sponsored public plans (Bloche & Jungman, 2002).
Also contributing to the physician’s effect on the cost of health care, malpractice insurance premiums have skyrocketed in recent years, and the doctors have been forced to drastically increase their fees in order to cover these premiums. Most doctors, especially those in private practice, are left with no alternative. Our nation’s attitude has grown more litigious over the last few decades and this scares doctors and rightly so. To practice medicine without malpractice insurance in these modern times would be tantamount to professional and financial suicide. The increased fees that doctors are charging are a direct response to the legal assault that they have faced.
Many physicians, especially those employed by managed care organizations, are becoming more and more familiar with healthcare rationing in order to stem the increase in physician utilization. Once a very controversial issue (Bloche & Jungman, 2002), healthcare rationing is now more like a rule than an exception. As the author of the opinion in Pegram v. Herdich of June 2000, U.S. Supreme Court Justice David Souter declared that the healthcare establishment has “the profit incentive to ration care” under the current system. HMOs and other managed care organizations are deciding who gets certain procedures and who does not. As many would think, they are not in an ivory tower thinking up these payment schemes and making decisions to influence life and death. They have provided monetary incentives to doctors to let the doctors make the rationing decisions for the HMO. According to the JCHLP study (p.634),
…health plans are paying doctors to do the bean counting: to
ration care at the bedside, often without their patients knowing
it. Afraid of possible tort liability and under pressure from
health care consumers, who hate HMO bureaucrats, health plans have
increasingly delegated utilization management to treating
physicians and put these physicians at large financial risk for the
cost of care.
While the physicians are to blame for some of the rise in healthcare costs, they have had much assistance from the managed care organizations that are so prevalent today.
As the costs of healthcare rise, one cannot ignore the area of prescription drugs in prescribing blame for the increase. Shifts in federal regulations regarding research and development and the preeminence of advertising for various brands of prescription (and non-prescription) drugs have greatly contributed to the increase in the cost of prescription drugs. On the development front, the number of new drugs has recently decreased. In 2002, only 15 new drugs made it through the FDA’s rigorous evaluation process to be approved for public consumption. This is low when you consider that the average for the years preceding 2002 was more than twice that number at 31 new drugs per year (Strunk & Ginsburg, 2003). When it comes to drug advertising, all one has to do is watch one of the television networks for 15 or 20 minutes and you will see an ad for a major brand name drug. These advertisements are expensive as well as frequent in order to present the best pitch to the consuming public for their products. The drug leading the pack in terms of direct-to-consumer advertising expenditures is Nexium with $183 million spent in 2002 (FIGURE 5). All the rules of marketing apply here. If you do certain things with your advertising, you can draw the largest number of customers. With so many of the products being specialized, the financial profitability scenarios of high-demand niche markets also apply. The drug manufacturers are doing everything they can to increase consumer demand.
The American people, as a whole, have demonstrated that they need and want drugs. More and more people, however, are taking various drugs out of want than need, and the drug manufacturers have taken notice. Drugs of all kinds are now big business and very profitable at that. The drug companies should not take all the blame for the cost increases, though, because some of them are have actually cut costs but the consumer ends up paying more out-of-pocket. In other words, consumers have gotten lower costs just like they have demanded, but they are still not happy because the costs have shifted to them in some cases. One major example would be Nexium. The cost per pill was approximately $4 per pill. Because it was available only with a prescription, consumers would get their doctor to prescribe it and then go get a month’s supply for a $10 co-pay with their “drug benefit plan” through their private health insurance (mostly employer-sponsored). Now, the same drug has been deemed suitable for nonprescription use, and the cost per pill has dropped significantly to $1, a 75% decrease in unit cost. Are consumers happy with this price reduction? Not at all. Now that it is a “non-prescription drug” sold over the counter, their health insurance plans no longer cover it. Instead of paying the covered price of $10 (co-pay), consumers must pay the uncovered price of approximately $30 (retail) for the same volume of pills. This new sensitivity to drug costs may have a positive effect eventually, but only time will tell.
According to a study by Stephen Latham published by the Journal of Legal Medicine, drug expenditures in the United States in 2001 topped $140.6 billion which accounted for an increase of 15.73% of the previous year’s expenditures. Many have said that drug prices are out of control, and in some arenas of care this is true. Newly patented drugs are pushed with great aggressiveness by pharmaceutical sales staff at doctor’s offices around the nation because the drug companies have such high profit margins on new patent-protected drugs. These profit margins, 18.5% in 2001, even make commercial banking look small in comparison (Latham, 2003). Price is not the only problem, however. The study found that only 22% of the rise in expenditures was related to pricing. Most of the increase came as a result of increased utilization. The consumers are simply demanding more and more prescription drugs. The Baby Boomers, as a group, have aged considerably and are demanding drugs. With the recent economic downturn, many Boomers are no longer affluent. Stock price erosion has taken their nest eggs with it, and many senior citizens or almost-senior citizens are looking for a way to afford their drugs. As a result, the state governments are being called upon to deliver solutions. Also in the mix is the new federal drug benefit, but it seems still too soon to determine whether that will materialize in any tangible way for most senior citizens.
Technology has also played a role in the rise of healthcare costs in the United States. In an article published in the Journal of Clinical Engineering, author Ode Keil notes that often technology is acquired in a seemingly disjointed and haphazard way by healthcare providers without much regard for cost effectiveness and overall fit into the operational environment into which it will be utilized. He views the planning efforts of health care professionals in the area of technology to be inadequate and almost even selfish. The attitude seems to be one of self-preservation and isolation. Instead, Keil recommends a series of six steps to promote “interdisciplinary collaboration” with regards to technological needs in healthcare (p.148):
The steps could include market research, evaluation of the
state-of-the-art, design studies, education, proactive assessment
of the projected changes to identify risks and educational needs,
and integration studies designed to assure interoperability of the
many types of equipment related to most patient care processes at
the current time.
Technology has advanced so much and so quickly that we are now capable of amazing things on the healthcare front that simply did not exist 20 or even 10 years ago. A study done in 2003 by Kandace Landreanau suggests that our “nation cannot afford to provide all the medical care that technological advances have made possible.” (p.18) The noteworthy part of this quote is that she was citing a study from 1999, four years previous. In technological terms, four years is a lifetime.
It’s actually longer than a lifetime for many product lines in the computer industry. A new model can be released during the summer months and be literally obsolete by winter. Technological change moves so rapidly that many purchases are not even fully depreciated properly by the time they are replaced for newer models with greater feature sets. These trends make it difficult to make good, value-creating proposals with regards to technology. Much effort, as Keil alluded to, is required to make the best of what little time is available for a product to be on the cutting edge of clinical effectiveness. The leadership of the healthcare provider systems and the professionals they work with need to put together plans that take into account the fragile value that technology can offer.
For many healthcare managers, the topics of technological effectiveness and cost control are too complex to tackle in the same conversation. These complex conversations need to happen, however, or we could end up with facilities that are ill-equipped to deliver the best available patient care, or conversely, overly equipped to deliver only cost-prohibitive patient care. The consumers must begin to choose between cost concerns and care concerns and make intelligent and principled decisions. With increased technological capacity comes the need for increased responsibility and restraint. New therapies are being developed for just about every ailment that mankind faces, but our nations’ leaders must decide who will pay for all of this advancement. Consumers are generally not interested in paying anymore for the care that they get.
In addition to the aforementioned factors, healthcare costs in the United States are being driven up by an intense labor shortage primarily in the area of Registered Nurses (RNs) who staff the frontlines of patient care. RNs account for the majority of the healthcare workforce in the United States, outnumbering doctors, and all other groups of practitioners. However, there are not enough nurses to meet the demands that most healthcare providers face. The main reason for the RN shortage has to do with the aging of the RN population (Landreanau, 2003). While many nursing students fill classrooms at nursing schools across the country, declining enrollments have not been able to keep pace with the number of retirements of older RNs.
Added to this predicament is the financial situation facing most hospitals. RN salaries continue to remain higher than the average American worker, but even the stable pay is not enough to retain good nurses for very long. Often RNs jump from job to job and hospital to hospital. The mounting recruitment and retention costs facing most hospitals have to be funded often at the expense of pay increases for RNs that are already on staff. This creates a compression problem where experienced older RNs who are not jumping from job to job end up making lower relative salaries than the new recruits. New RNs are offered everything under the sun just to come on board while the more experienced RNs sit by and watch. This creates resentment among more experienced employees, and pay struggles ensue. Although it is tempting for hospital finance managers to authorize pay increases to stay competitive in the RN labor market, the tightness of the competition results only in an increase in the salary midpoint. For example, consider a metropolitan medical complex consisting of numerous hospitals and healthcare facilities. If the overall average for all facilities as a group is $35 per hour for RNs, and one hospital increases their pay by $0.50 per hour to $35.50, they will attract RNs from the surrounding facilities. This attraction will only be short-lived, however, because the other facilities will begin to match that salary level. In just a matter of months, all that has been accomplished is an increase in the average salary, and the hospitals are still facing shortages. The only difference now is that the price level of their shortage has increased which makes the situation even more untenable. Until there is a major positive shift in the general population regarding the nursing profession as a desirable career, hospitals will dance around these compensation issues and still face critical labor shortages. As with all economic decisions, certain variables will have to change before a positive outcome is realized.
The last, but certainly not the least, major cost driver of healthcare costs in the United States is the problem of uninsurance. Uninsurance is a term that has recently arisen to identify those who do not have private or public health insurance. Unfortunately, they bear significant costs when they seek medical care. Because of this fact, many uninsured individuals do not seek or receive adequate levels of medical care. Jonathan Oberlander, of the Department of Social Medicine at the University of North Carolina at Chapel Hill, did a study of the healthcare system in the United States and found that “over 40 million Americans” are uninsured (p.163). This amount of uninsured is alarming not only in sheer size, but also because this number includes millions of children. The study further suggests that of the uninsured population, 25% of the children and 40% of the adults do not have a “regular source of medical care” (Oberlander, 2002, p.164).
Most uninsured individuals fall into one of two categories. The first includes workers who do not have employer-sponsored health benefits, and the second is those who are employed, but cannot afford the employer-sponsored health benefit premiums. Oberlander’s study shows that the vast majority of uninsured are disproportionately poor. Both of these groups are hard pressed to afford private health insurance plans because the premiums are priced so high. This means that 100% of their health care spending is considered out-of-pocket as opposed to the average of 47% (FIGURE 6). Out-of-pocket payments for uninsured individuals are dollar-for-dollar whereas the same out-of-pocket payments for insured individuals buys much more medical care. For example, a $1000 procedure will cost an uninsured person $1000 out-of-pocket, but it would only cost an insured person approximately $200 if they had the average coverage option of 20% coinsurance.
The high premiums stem largely from the underwriting cycle that currently engages the insurance companies. When insurance companies sustain losses and decreased profitability, they typically increase premiums in order to play “catch-up” with their bottom line (Strunk & Ginsburg, 2003, p.272). These increases can be substantially more than the costs that are experienced, but the opportunity of demand inelasticity in healthcare allows the companies to solidify their profits in order to then change strategies and begin stiff price competition with the other vendors. The premiums may eventually decrease, but in the meantime, millions of Americans cannot afford the coverage.
ANALYSIS AND DISCUSSION
So far this study has focused on the six biggest contributors to the rise in healthcare costs in the United States: hospitals, physicians, prescription drugs, technology, labor shortage, and uninsurance. These factors are daunting indeed and each has, in its own right, contributed to the cost problems we face. However, this study would suggest that it is the combination of all six areas that is the most powerful cost driver for healthcare in the United States. The interrelations are many and diverse. Any two or three from the list of six can be causally linked in a variety of combinations. The common ground that each set of issues shares is the question of who is to pay for the services. Consumers do not want to pay their own way while at the same time, insurance companies cannot survive if they carry all claims and losses. Physicians will not practice medicine if the payment structures are eroded irreparably, and drug companies will cease to develop new drugs if their confidence is shaken as to where the revenues will be. Upward pressure on nursing salaries to alleviate the shortage requires precious resources be allocated away from other areas like technology acquisition and research. The healthcare system in the United States exhibits a great deal of interdependence making it difficult if not impossible to analyze its components in isolation.
Perhaps the greatest cost driver of all is consumer demand. Healthcare expenditures grew almost 10% in 2002 across all categories (FIGURE 1). According to another study, when compared to other nations in the Organization for Economic Cooperation and Development (OECD), healthcare expenditures in the United States averaged $4,631 in 2000. This represented a 134% increase from the median of $1,983 for the other OECD countries (Kohn, 2003). American consumers demand many things and one of them is immediate competent healthcare for a very low out-of-pocket payment. This great disparity in the expenditure averages cannot be totally attributed to pricing or to the aging of the Baby Boomers. It is a combination of many such factors that have inflated these costs and created a monstrous appetite in the United States for healthcare consumption.
This study suggests that prevention may be the greatest method to stem the upward cost trends that we are facing. Of the leading diseases that plague Americans, almost all of them are preventable for most of the population. Most forms of cancer have prerequisite risky behaviors to lead their development. Smoking, for example, is one of the biggest risky behaviors as it contributes to the death of an estimated 400,000 people each year. Efforts to stop smoking are worthwhile and can have a major economic impact in the healthcare arena. Another example involves the link between obesity and diabetes prevention. Diabetes, unless inherited, is a preventable disease that not only stays with you, but is also very expensive to maintain. A diabetic known to the author spends over $450 each month on expenses related to the maintenance and treatment of diabetes. The majority of cases are lifestyle-related, so there are opportunities for prevention. School aged children need to be educated about the hazardous and costly effects associated with diabetes, a result that may be caused by years of skipping their meats and vegetables and eating sugar products instead. The education could also look at the concept of opportunity costs not only of the expenses of disease maintenance but the lost income from lack of investment. For example, if a 15 year old student endeavored to engage in no risky behaviors (eating properly and avoiding cigarettes) and was able to successfully avoid preventable diseases such as diabetes and lung cancer, she could save the $450 that she would have been spending on her maintenance supplies each month. She could also save the $100 that she would have been spending on a smoking habit (one pack per day). When she is ready to retire at age 65, assuming a 12% long-term return on her diversified growth stock portfolio, she will have approximately $15,840,120! And she has not even touched her 401(k) or pension funds yet. That is an idea that could get and keep the attention of the next generation. The secondary societal benefit of the prevention/opportunity cost model is that future health care expenditures are easily self-funded which relieves the private and public health insurance systems of another unneeded burden. Young people can make choices when they are young that can drastically lower their risk of both illness (driving the demand for healthcare) and poverty (driving the financial risk of healthcare).
SUMMARY AND CONCLUSION
As the costs of healthcare in the United States continue to remain high, policymakers and leaders in almost every sphere of influence in our society must continue to try to find solutions to the problems. Of all of the drivers of cost that currently impact the healthcare system, it is the combination and interdependence of them all that poses the most formidable threat. Hospitals, physicians, and prescription drugs seem to be driving the bulk of the cost increases. However, these problems would not be as great without the continual challenges involving the national labor shortage of RNs, the high cost and obsolescence risk of new technologies, and the everpresent epidemic of uninsured or underinsured individuals. Behind all of these trends is a growing consumer mentality that continues to demand more and more healthcare. The key to solving the healthcare cost crisis in the United States involves reducing consumer demand. One effective way to reduce this demand would be to focus on prevention strategies that reduce or even eliminate the great need for certain healthcare expenditures. Opportunity cost of inaction is a big factor that needs to be addressed and communicated. The younger generations need to be brought up with a different mentality regarding healthcare. Until this generational shift in thinking about healthcare occurs, the healthcare system of the United States will continue to struggle with ever-increasing costs.
Bloche, M. G. & Jungman, E. R. (2002). The ‘R’ Word, Journal of Contemporary Health Law & Policy (Fall), 633-670.
Keil, O. R. (2002). The High Cost of Trendy Health Care, Journal of Clinical Engineering (July), 27(3), 147-148.
Kohn, C., Walton-Brooks, D., Henderson, C.W. (2003). Americans pay more for health care but receive less in return. Managed Care Weekly Digest (May 26), 3-4.
Landreanau, K. J. (2003). Cost Issues Related to American Healthcare Policy, Nursing Forum (Jan-Mar), 38(1), 17-21.
Latham, S. R. (2003). Pharmaceutical Costs: An Overview and Analysis of Legal and Policy Responses by the States, The Journal of Legal Medicine (June), 24, 141-173.
“Medical Cost Reference Guide: Healthcare Cost Campaign,” Blue Cross Blue Shield, http://bcbshealthissues.com/cost/costguide.vtml
“National Health Statistics,” Center for Disease Control, www.cdc.gov
Oberlander, J. (2002). The U.S. health care system: On a road to nowhere? Canadian Medical Association Journal (July 23), 167(2), 163-168.
Strunk, B. C. & Ginsburg, P. B. (2003). Tracking Health Care Costs: Trends Stabilize But Remain High in 2002, Health Affairs (June 11), W3-266–W3-274.
Joel Bolton, Sam Houston State University Balasundram Maniam, Sam Houston State University Ron Earl, Sam Houston State University
FIGURE 1: Annual Percentage Change
Per Capita in Healthcare Spending and GDP
All Hospital Hospital Rx
Year Services Inpatient Outpatient Physician Drugs GDP
1991 6.9% 3.5% 16.8% 5.4% 12.4% 1.8%
1992 6.6 2.8 13.9 5.9 11.7 4.2
1993 5.0 4.8 8.9 3.3 7.1 3.8
1994 2.1 -2.0 8.7 1.7 5.2 4.9
1995 2.2 -3.5 7.9 1.9 10.6 3.7
1996 2.0 -4.4 7.7 1.6 11.0 4.4
1997 3.3 -5.3 9.5 3.4 11.5 5.2
1998 5.3 -0.2 7.5 4.7 14.1 4.3
1999 7.0 1.6 10.2 5.0 18.4 4.4
2000 7.8 2.5 11.5 6.3 14.5 4.8
2001 10.0 7.1 16.3 6.7 13.8 1.7
2002 9.6 6.8 14.6 6.5 13.2 2.7
SOURCE: Health care spending data are from the Milliman USA
Health Cost Index ($0 Deductible). GDP (in nominal dollars) is from
the U.S. Dept. of Commerce, Bureau of Economic Analysis.
FIGURE 2: Percent Distribution of Emergency
Department Visits By Immediacy of Care Needs
No triage / Unknown 25.5%
Note: Table made from pie chart.
FIGURE 3: Inpatient Spending Growth per Capita, 1992-2002
* Data through June 2002, compared with corresponding months in 2001
SOURCE: Milliman USA Health Cost Index, as reported by Strunk,
Ginsburg, and Gabel, 2002, as reported by Blue Cross Blue Shield, 2003.
Note: Table made from bar graph.
FIGURE 4: Average Length of Stay in Days, 1995-2001
SOURCE: American Hospital Association, 2003, as reported by Blue
Cross Blue Shield, 2003.
Note: Table made from bar graph.
FIGURE 5: Spending on Direct-to-Consumer Advertising,
SOURCE: CMR/TNS Media Intelligence and Publishers Information
Bureau as published by Blue Cross Blue Shield.
Note: Table made from bar graph.
FIGURE 6: Distribution of Household Spending on
Healthcare in 2000
Private Health 30%
Medicare Premiums ** 4%
Payroll Taxes * 19%
* Employee and self-employment payroll taxes and voluntary premiums
paid to Medicare Hospital Insurance Trust Fund.
** Premiums paid by individuals to Medicare Supplementary Medical
Insurance Trust Fund.
SOURCE: Centers for Medicare and Medicaid Services, as reported by
Cowan, 2002, as reported by Blue Cross Blue Shield, 2003.
Note: Table made from pie chart.
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