US healthcare costs are enormously high leaving little that can be saved by the average person. We spend over $4.25 trillion per year on healthcare in the US, which is about 20% of our GDP. In other words, people in the US spend $1 of every $5 on healthcare. Our average per-person healthcare costs in the US are roughly double the costs per person of other developed countries, yet our quality of healthcare ranks at the bottom of the world.
Breakdown of Healthcare Costs and Growth Over Time
Roughly half of the $4.25 trillion of healthcare costs are funded privately with the other half funded publicly by the government. Private health insurance is funded through the following: employers (28%); out of pocket spending such as copays, deductions, direct payments, etc. (10%); and other third-party payers. Public funding is mostly comprised of Medicare for over 65 years of age (21%) and Medicaid for low-income citizens (17%) along with a variety of other government-backed programs and investments.
Approximately one-half of the $4.25 trillion in annual US healthcare costs are spent on patient care at hospitals (31%) and clinics that perform outpatient care (20%). In addition, there are other care service categories such as nursing homes, residential care facilities, home healthcare, etc. Prescription drugs costs contribute to 9% of annual healthcare costs with dental services contributing 4%. The administrative costs highlighted below are government related administration as healthcare providers’ administrative costs are included in the cost of care categories and not categorized separately.
US healthcare costs have grown at significant rates over past decades. Since 1984, healthcare costs have grown 10 times, yet household income has only grown three times. The US went from spending 50¢ of every $5 on healthcare in 1984 (10% of GDP) to spending $1 of every $5 on healthcare (20% of GDP). In 1960, US healthcare costs were approximately 5% of GDP (one-quarter of what it is today). Other developed countries’ healthcare costs (e.g., United Kingdom, France, Canada) are currently about 10% of GDP.
How are High Healthcare Costs Really Getting Paid?
US citizens effectively pay for healthcare. Many people tend to think “insurance covers it” but that is a bad way to think about it. The bulk of the $4.25 trillion of healthcare costs is funded by public and private insurance as highlighted above, which is generally funded by our tax dollars and wages. Employers have also taken some of the brunt of increasing healthcare costs, but increased funding of healthcare costs by employers effectively result in lower wages paid by employers, so employees are essentially paying for it. Overall, studies show that rising health care costs are passed to workers in the form of lower wages and less generous benefits.
The average health insurance premium through employers has increased from $15,073 in 2011 to $22,221 in 2021 for family coverage. This is an increase of nearly 50% in the last decade when household income has increased by just over 40%. Healthcare premium increases (for which employees pay over 25%) that are continuously rising faster than average wages put continuous pressure on employees’ take-home pay as their share of rising healthcare costs far exceeds their increase in pay.
Why are US Healthcare Costs So High?
There are a variety of reasons why healthcare costs are so high in the US. The biggest reason may be the administrative costs related to our complex multi-payer system, which are estimated to be at least 25% of our total healthcare costs, including some estimates as high as one-third. Other countries spend a small fraction of this amount on administrative costs.
Nearly a third of physicians say that they spend 20 hours or more a week on paperwork and administrative tasks, with overall average over 15 hours per week. Half of the administrative costs are estimated to be billing and insurance-related (BIR) that come from an overly complex payment system. Although the BIR process is overly complicated, there are many standardization and automation opportunities. Data interoperability has created better information flow but comes with many new technical difficulties and security risks. There are many different proposals to solve the challenges related to excessive administrative tasks and related costs (e.g., central clearinghouse).
In addition to excessive administrative costs, additional reasons for high US healthcare costs include the following:
- Over-treatment and the incentives that come from the fee-for-service payment model
- Prescription drug prices that are increasing at high rates
- Chronic diseases that account for the majority of healthcare treatment costs
- Lifestyle choices that make people unhealthy and cause chronic conditions
The traditional fee-for-service (FFS) payment model pays doctors to treat patients’ diseases and injuries. It does not pay to keep patients healthy or reward doctors for high-quality services. Basically, the more hip replacements a doctor can do, the more money the doctor makes. There are of course many great US doctors that don’t overtreat in efforts to make more money, but the FFS model naturally incentivizes them to do so.
Prescription drugs play a critical role in helping prevent, manage, and cure symptoms and diseases, but medication costs have become an expensive budget issue for patients and employers. Chronic diseases such as arthritis, obesity, cancer, and heart disease account for the vast majority of treatment costs. Bad lifestyle choices and unhealthy living only make these matters worse.
What Can Be Done About It?
Just solving the high administrative costs is almost half the battle. Since US healthcare costs are double other developed countries, and administrative costs are 25% of total US healthcare costs, cutting the majority of these costs to be more equivalent to other countries would get us almost halfway there. In addition to many proposals that address this, automation alone can make a huge difference as a significant portion of these administrative tasks are performed manually and can be automated.
Value-based care (VBC) is another big opportunity to address the high costs of US healthcare. Moreover, VBC addresses quality and access to care in addition to costs. However, after nearly two decades of trying to get the healthcare industry to transition to VBC, it is moving slowly as it is difficult to help doctors understand how they can take on the risks and be profitable in the new payment models that come from VBC (e.g., capitation and bundled payments). See the Value-Based Care Research Section of CenturyGoal for more information on VBC.
There are also many proposals on how to address prescription drug prices, chronic disease management, and lifestyle choices. Prescription drugs are a challenge due to patent laws and political lobbying. Progress has been made on programs that more efficiently address chronic disease management. Lifestyle choices are the responsibility of individuals but are somewhat considered in requirements for extra insurance premium costs (e.g., smoking).
Sources:
- https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData
- https://www.healthsystemtracker.org/chart-collection/health-spending-u-s-compare-countries/#Per%20capita%20health%20consumption%20expenditures,%20U.S.%20dollars,%20PPP%20adjusted,%202020%20and%202021
- https://www.bcbs.com/issues-indepth/why-does-healthcare-cost-so-much
- https://www.harvardmagazine.com/2020/05/feature-forum-costliest-health-care
- https://www.pgpf.org/blog/2023/01/why-are-americans-paying-more-for-healthcare#:~:text=There%20are%20many%20possible%20reasons,insurance%20and%20provider%20payment%20systems
- https://www.definitivehc.com/blog/5-reasons-why-healthcare-costs-are-rising
- https://www.heritage.org/health-care-reform/commentary/fact-americans-will-soon-spend-1-out-every-5-dollars-healthcare
- https://fred.stlouisfed.org/series/MEHOINUSA646N
- https://usafacts.org/data/topics/people-society/health/healthcare-expenditures/healthcare-expenditures-as-of-gdp/
- https://www.healthsystemtracker.org/chart-collection/health-spending-u-s-compare-countries/#GDP%20per%20capita%20and%20health%20consumption%20spending%20per%20capita,%202021%20(U.S.%20dollars,%20PPP%20adjusted)
- https://www.rand.org/pubs/working_papers/WRA621-2.html
- https://files.kff.org/attachment/Report-Employer-Health-Benefits-2021-Annual-Survey.pdf
Meade Monger, founder of Dallas-based CenturyGoal, is an expert in corporate restructurings, transformations and digital strategy. He is currently a PhD candidate in healthcare research.
