Why Are Healthcare Costs So High?

Healthcare costs are high, in part, because of the incentives that patients face, but not exclusively. Increasing costs are at least partially the fault of patients, who are encouraged to spend as little money as possible out of pocket. They are also conditioned to think that healthcare is free or cheap, and they may not value healthcare as a service, given that third-party payers cover most of their costs. Patients may not be aware of the cost implications of their actions, but the consequences are very real.

Why Are Healthcare Costs So High?

Using health status alone to determine health insurance costs does not account for the fact that some people do not need expensive medical services. In some areas, health status alone is actually a poor indicator of health expenditures because these individuals are medically underserved. Health status alone may also not be an accurate measure of expected  Hilton Healthcare Worker Discount spending. In these regions, health care spending is more than three times higher than it would be in areas where health insurance is widely available.

Administrative costs created by efforts to control prices

The cost of administration makes up about one-fourth of health care spending, according to the World Health Organization (WHO). While many studies focus on the “BIR” component of administration, this cost category also includes the expenses related to claims processing, billing rates, and health insurance. Of these, the largest portion is attributable to health insurers and providers, and the remaining portion is attributable to non-government sources.

High administrative costs reflect inherent problems in the health care system. Because health care expenditures are unpredictable and expensive, individuals require insurance. This skews market outcomes and makes prices and utilization higher than they otherwise would be. The US health care system relies heavily on the competitive market and the competing insurers to determine prices. While the resulting administrative costs are astronomical, many believe they are necessary and can be reduced.

Pharmaceutical drugs drive healthcare costs

Currently, pharmaceutical costs account for 17 percent of all health care costs, and these costs are projected to continue to increase unless government action is taken. But costs are not the only driver of healthcare spending: other factors also contribute to this. According to a Harvard Medical School study published in the journal Health Affairs, the high cost of drugs is largely due to the intensive use of drug utilization measures, such as prior authorizations. By de-escalating this practice, pharmaceutical companies would be forced to cut prices and lower barriers to patient access.

New drugs contribute substantially to the recent growth in drug spending, but these drugs cost more than older drugs. In fact, some estimates show that the cost of a prescription for a new drug is nearly two and a half times higher than the cost of the same drug in the same age group. This means that nearly half of the increase in healthcare spending was due to the costs of new drugs. While this is a relatively low percentage, it is still significant and will continue to grow at a rapid rate.

Medicare prices set by the federal government

The answer to this question may be complicated, but price caps and rate-setting have their advantages. In some cases, rate setting limits competition and drives improvements in quality and efficiency. Physicians at academic medical centers often charge less than their community counterparts.

This is particularly problematic because physicians are not held accountable for the quality of their services. Ultimately, price caps and rate-setting have a dual purpose: to protect patients and to control costs. However, their use is limited by the political whims of state governments.

Commercial insurer prices vary significantly, compared with Medicare FFS prices. Wide variation in prices indicates that markets are not operating efficiently.

Commercial insurers may pay higher prices for health services because they have more power than physicians, but that may not necessarily be the case. The difference between commercial insurer prices and Medicare FFS prices is due to differences in health care utilization and quantity. Insurers may view these providers as essential, leading to higher prices.