Rising Health Care Costs

 The Problem | The Causes | The Solutions | Premiums | Related Issues 

More than one-sixth of the U.S. economy is devoted to health care spending and that percentage continues to rise every year. Regrettably, our system is not delivering value commensurate with the estimated $2.7 trillion spent annually on health care. Experts agree that an estimated 20 to 30 percent of that spending – up to $800 billion a year – goes to care that is wasteful, redundant, or inefficient. 

Rising health care costs punish our nation on multiple fronts. For families and seniors, the soaring cost of medical care means less money in their pockets and forces hard choices about balancing food, rent, and needed care. For small businesses and Fortune 500 employers alike, they make it more expensive to add new employees, more difficult to maintain retiree coverage, and harder to compete in the global economy. For federal, state, and local governments, rising health care costs lead to higher Medicare and Medicaid costs, and reduced funding on other priorities such as infrastructure, education and public safety.  The net results of rising health care costs are far-reaching and ominous: higher costs for health insurance, the fraying of the nation’s safety net, an erosion in our global competitiveness, and long-term fiscal insolvency.

While the health reform law makes important strides in expanding coverage, much more is needed to rein in the rising cost of health care.

The Causes 

There are many causes of higher health care costs and spending. These causes include higher prices for medical services, paying for volume over value, defensive medicine, use of new technologies and treatments without considering effectiveness, and a lack of transparency of information on prices and quality. There is also evidence that provider consolidation is having a significant upward pressure on health care costs. The causes of higher health care costs and spending are not simply or easy to solve, but they must be addressed or the impact will be severe.

   

The Solutions  

Reducing the rate of growth in health care costs requires a collaborative, inclusive, and bipartisan approach. While there is no simple formula for lowering the growth in health care costs, stakeholders have long recognized that there are many areas where common ground can be found. 

Health plans are playing an important role in lowering health care costs. Health plans are partnering with providers to create innovative, high value payment systems to reward value and quality over volume.  Health plans are also empowering patients with new coverage options that focus on high-performing providers and key tools like care coordination and case management for individuals with chronic conditions. These types of approaches are helping to move the nation away from the broken and unsustainable fee-for-service system toward a health care system better suited for the 21^st century. 

AHIP's Board of Directors has released a statement addressing the soaring cost of health care, outlining three key strategies for reducing health care costs:

• Tackling Barriers to Transparency: "Action must be taken to eliminate barriers that prevent stakeholders from understanding how markets are (or are not) working. Increased transparency—with a concurrent focus on quality—will lead to greater awareness of the specific market dynamic and give consumers and purchasers a better line of sight into the drivers behind the growth of health care costs in their community as well as an understanding of the impact of dynamics such as provider consolidation." 

• Facilitating Benefit Modernization: "Today, a range of legal, regulatory, or operational barriers often prevent plan innovations from being realized in local communities. To address these barriers, cost containment strategies must modernize these 'rules of the road' to ensure that innovative plan designs—aimed at decreasing costs while ensuring safe, high quality care—can thrive."  This includes re-evaluating scope of practice requirements, accelerating use of Health IT, promoting preventive care and wellness programs, promoting laws or regulations that support innovative delivery structures, and eliminating excessive network requirements that prevent plans from forming lower cost, high quality networks. 

• Advancing Bold, Structural Reforms: "Strategies to address soaring health care costs need to include fundamental, structural changes in the health care system. Further, action needs to be grounded where health care is delivered today—at the state and local levels." A state-federal shared savings, or "gain-sharing," initiative could be implemented that would allow states to keep a portion of any health care cost savings they generate. "This would direct hundreds of billions in needed incentives to cash-strapped states, while at the same time bending the total cost curve and having a productive impact on the economy as a whole, as well as family, corporate, and government budgets." 

Health Care Costs and Premiums 

Rising health care costs are making health care coverage more expensive for individuals, families and employers.  Government data show that the growth in premiums has tracked directly with the growth in underlying medical costs.  Thus, as health care costs increase, so do premiums. 

The health care reform law also includes a number of changes that will impact the benefits people receive and the premiums they pay.  Covering pre-existing conditions, requiring a broader benefit package, and covering uninsured Americans who have gone without medical care will benefit millions of people while increasing the cost of health care coverage.  The new health insurance tax and other fees will also increase premiums.  Other provisions of the law will make health care coverage more affordable, including premium and cost-sharing subsidies and the transitional reinsurance program, which provides funds to help offset the impact of high-cost enrollees. 

The impact on specific individuals will vary significantly depending on their age, gender, location, health status, income level, and what coverage they have today.  Young, healthy males could see substantial increases due to the combination of these reforms while older, less healthy individuals could see rate reductions.

To learn more about all of these factors, click here.

Related Issues 

Follow the links below to learn more about rising costs, their impact on health insurance premiums, and what can be done to reduce the rate of growth in health care:

• U.S. Health Care Spending 101 iPad App 
• Premiums 101 
• Reducing the Soaring Cost of Medical Care