Understanding and Managing the Complexity of Healthcare

3 Healthcare Costs and Their Causes

The enormous cost of healthcare in the United States is often cited as a key national challenge (Economist, 2004; CBO, 2008). Healthcare is consuming an increasing portion of the gross domestic product (GDP). At the same time, there are concerns that the quality of healthcare in the United States lags that of other countries (Institute of Medicine, 2000, 2001). It is clear that substantial improvements in the delivery of healthcare value are needed and, it is argued, achievable via value-based competition (Porter & Teisberg, 2006). Of course, it should be kept in mind that our healthcare system emerged as it has over a long period of time, for a variety of reasons (Stevens, Rosenberg & Burns, 2006). The growth of healthcare costs in the United States has been a “poster child” for out-of-control spending for some time. How bad has it been and what does the future portend? Since 1960, healthcare costs in the United States have grown five times as much as GDP. More recently, the growth rate of healthcare costs has declined from a high of 9.5% annually in 2002 to 4.0% in 2009. This decrease was due to changes in patterns of coverage. Fewer people were covered by employer-based insurance (a record low), and more were covered by public assistance (a record high). Decreased consumption during the recession also played a role, as did increased use of generic drugs (Bradford et al., 2011). It is useful to note that these sources of the decreased growth rate are not sustainable, as decreased employer support and increased public assistance are not desirable trends. Future healthcare costs can be predicted based on patterns of past cost (e.g., Bertsimas et al., 2008), although this is premised on the overall system not changing in any substantial way. For example, if significant insurance reform continues, we would need to predict behavioral choices and coverage consequences of insurers, employers, and individuals under the current system and under reform (Blumberg et al., 2003). Because of the Affordable 3 Healthcare Costs and Their Causes 36 Chapter 3 Care Act, the system is changing, and the behaviors of key stakeholders are very much uncertain. These trends beg the question of why healthcare costs are so high. Americans have no idea what their healthcare will cost, pay only 15% of the total, and hence are not motivated to make “market-based” decisions. Providers , in contrast, are paid for everything they do and are thereby incentivized to do more. The increased costs of doing more are passed on to insurers who then increase premiums to employers. Increased healthcare costs cause employers to constrain wages to cover these costs. This has resulted in depressed wage levels across the United States for the past two decades. In 2008, for instance, employer-provided health insurance reduced wages by 7.9% (Economist, 2009). Maternity care is an area where many Americans do ask about prices in advance. However, 62% of women who have private health insurance that is not employer-based do not have maternity coverage. The cost of maternity care has tripled since 1996, and 4 million annual births cost well over $50 billion. From 2004 to 2010, prices grew by almost 50%. When one woman, with insurance but not maternity care, asked her provider about the price of her maternity care, the hospital told her to plan on something in the range $4,000 to $45,000 (Rosenthal, 2013). As elaborated later, many hospitals have no idea of the costs of delivering their services. DeVol and colleagues (2007) attribute much of the growth in costs to the increased prevalence of chronic diseases (e.g., hypertension, diabetes, and heart disease). Direct medical costs for seven chronic diseases were $277 billion in 2006, while indirect costs of lost productivity and related phenomena totalled $1.1 trillion during that period. Thus, the cost of chronic diseases at that time was $1.4 trillion per year. DeVol et al. project these costs will reach $6 trillion by 2050. Much of these costs, they argue, are avoidable via healthier lifestyles. This possibility is explored in chapters 5 and 6. This would seem to argue for investments in wellness and prevention of chronic diseases. However, the Congressional Budget Office (CBO, 2009) has concluded that preventative care, offered broadly, increases overall costs. Downstream savings on the small portion of people who benefit from such care do not offset the increased costs of broad application of the care. As shown in chapter 5, this conclusion...