In the last thirty years there has been a significant increase in the amount of resources the United States devotes to providing medical care. In 1980 health care costs accounted for 9% of GDP, in 2004 this number had climbed to 16%. This upward trend is also reflected in per capita costs, rising from $1,106 in 1980 to $7,290 in 2007. Clearly this has impacted total annual health care spending, increasing from $255 billion in 1980 to $2.2 trillion in 2008. Taken together these facts point to fundamental challenges facing the healthcare system in the United States. To understand how costs have climbed so rapidly in recent years it’s critical to examine several contributing factors in detail. It’s also important to compare the quality of care delivered in comparison with other nations who on average, spend significantly less per-capita, and as a share of GDP.
A breakdown of the underlying factors that have collectively had an impact on rising health care costs in the United States could begin with the emergence of chronic diseases as the most common ailment and primary cause of mortality. Over 133 million Americans are classified as having a chronic illness, accounting for almost half of U.S. adults. Close to 70% of total annual mortality, or 1.7 million deaths, are caused by the presence of one or more of these afflictions. The top three diseases for mortality (heart disease, cancer, and stroke) are all of this type. This is a far cry from the days when communicable diseases such as small pox, syphilis, polio and others, were the main health concerns in America. Not only are chronic diseases much more rampant, they are also extremely expensive to treat. In fact over 75%, of total annual health care costs or $1.6 trillion, are attributable to chronic illnesses.
The impact of chronic diseases is also evident in the current distribution of health care costs in the United States. It’s a system that has become extremely top-heavy with regard to expenditures. A significant percentage of health care expenses (49%) are centered in a relatively small population (5%). The majority (61%) of the group was over 55. In addition, the top 15 most expensive health conditions make up 44% of total spending, and all but one are classified as chronic.
Another contributing factor in the rise of health care costs has been escalating financial inefficiency in the form of extraordinarily high administrative expenses present in both the private and public sectors. A Harvard study conducted in 1999 found that costs associated with health administration were $294.3 billion and equated to $1,059 per capita. It’s important to remember that these aren’t costs for providing actual medical care, but rather the bureaucratic processes involved in maintaining the system. Overhead costs, particularly in the private insurance sector made up a sizable percentage of overall administrative costs. In 1999 for instance, private insurance entities spent 11.7% of total premiums collected on administrative overhead, compared with Medicare (3.6%), and Medicaid (6.8%). Hospital administration also accounted for a significant percentage of total costs (24.3%), at $315 per capita. In order to put the high level of these costs into context the study compared the data with that from equivalent sectors in the Canadian health care system. The administrative costs in the United States were consistently much higher than those in Canada, especially when considered at a per capita level. Total admin costs for America were $1,059 per capita, compared to only $307 in the Canadian system. It’s important to note that Canada operates under a publicly funded national health system, whose uniformity effectively cuts out much of the bureaucracy, and allows for the elimination of many of the administrative expenses present in the public/private system.
Prescription drug costs are a third important component in the rise of overall health care spending. Expenditures associated with this industry have exploded in the last twenty years. In 1990 drug costs were at $40.3 billion, by 2008 this number had risen dramatically to $234.1 billion. For much of the 90’s and early 2000’s prescription drugs were the fastest growing health cost contributor (18% in 1999). Overall the prescription drug sector accounted for 13% of the total health care cost growth in a 10-year period from 1998-2008. During the same time-period the average cost of a prescription drug rose substantially, from $38.43 to $71.69. It’s evident that this is at least partially due to an increase in demand for prescriptions, which rose by 39%, or about a billion total prescriptions between 1999 and 2009. Another aspect of these high costs is the difference in price between generic and name brand drugs ($35.77 compared to $137.90). Pharmaceutical companies have a significant profit motive to retain exclusive patent rights for name-brand drugs beyond the 20 years allowed by the FTC. Often this takes the form of “pay-for-delay” deals in which firms holding expiring drug patents pay those companies developing a generic version not to release them. Arrangements such as these are responsible for several billion in additional prescription drug expenses each each year.
To provide context for the level of spending in the United States on healthcare it’s useful to compare it with other advanced nations. This comparison is with regard to both expenses and whether this equates to quality of care. It seems to be a common belief that because the United States spends by far the most per capita ($7,290, 2.5 times higher than the OECD average) on health care, that it must also be providing the highest quality of care. In looking at comparative health data this appears to only be sporadically true. The United States has an infant mortality rate of 6.7, which is significantly higher than the OECD average of 4.7. It’s also middle of the pack in life expectancy (28th in the world, at 78.2 years), trailing far behind countries like Japan (86.4 years) that spend about a third as much as the U.S. per capita. In terms of access, the United States is the only OECD country that has a significant population that has been left uncovered by the healthcare system. Staffing is another measure where the United States lags behind the OECD average, with regard to doctors per capita (2.7 physicians per 1,000, OECD average is 3.1), and nurses per capita (8.1 per 1,000, OECD average is 9.0). While all of the preceding data indicates that the United States high costs haven’t led to a particularly high level of care, however there is one area where cost does seem to equal quality. The United States scores at or near the top of OECD rankings in the screening and treatment of many forms of cancer such as melanoma, prostate, breast, ovarian, cervical, and both Hodgkin’s and non-Hodgkin’s lymphoma.
Based on the research presented above the United States has been saddled with ever increasing health care costs due in part to the rise in chronic disease, drug prices, and an extremely inefficient administrative process. These are facts that were featured prominently in 2010, during the national debate based around exactly how to reform the system. The piece of legislation known as the Affordable Care Act, passed as a compromise in that debate, attempts to address the cost and access issues without fundamentally altering the structure of the system. The degree to which this effort will ultimately help contain costs won’t be seen for several years, as the act will not be fully implemented until 2014. However there are projected future cost and access levels available and will be examined in detail, with the specifics of the Affordable Care Act, in the next post.
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