Consequences of Forty Years of Health Care Cost Escalation

U.S. health care costs have increased from 4.6 percent of gross domestic product (GDP) in 1950 to greater than 17 percent of GDP in 2010. This cost escalation, which is projected to reach over 20 percent of GDP in the next few years, is simply not sustainable. If the health care sector continues to consume an ever-larger portion of the GDP, then the United States will have progressively less to spend on other public services such as education and national defense. As the appetite for more and more expensive health care services continues to grow, the costs of this growth will place ever-greater limitations on both public and private expenditures for everything else produced by the economy. This in turn affects international competitiveness, take-home pay from employment, and most important, the availability of health care services for a large part of the population.

According to Fuchs (2012) the growth of health care expenditures in the last several decades is affecting the viability of the U.S. government and is also a primary cause of the stagnation of wages in the vast majority of American industries. The continual increase in health care expenditures, especially in recent years, is one of the greatest challenges to ever face the United States. Fuchs (2012) also argues that the real cause of health care cost escalation over the last several years has been the development and use of new technology and the increased labor specialization that results from this technology. Often new technology adds costs to health care delivery while offering very little benefit. The key is to use cost-benefit analyses before adopting any new technology; however, there is little that can be done to slow the growth of technology in health care, even if that were what was wanted. The good news is that much of the new technology being developed should improve health outcomes and, in the long run, result in lower health care costs, as long as we make certain that the costs are equal to the benefits and we are not wasting scarce resources.

The availability of health insurance from employers has also been a major cause of cost escalation in health care. Until recent years it was the norm for health insurance premiums to be part of an employee's benefit package. The government subsidized this benefit by allowing businesses to claim these health insurance costs as a tax deduction and by ruling that employees do not have to treat the value of their health insurance as income. Since there was thus little cost to the company or the employee for a better insurance package, individuals and their unions could periodically demand and receive better health insurance packages from their employers. Insurance companies, moreover, have been reluctant to invest in any change that increases costs in the short term, even when a change could produce benefits, including lower costs, in the long term. A good example of this is that insurance companies often refuse to pay physicians to return patient phone calls or emails, even though this practice might result in fewer emergency room visits. There is also a reluctance by many health insurance plans to pay physicians for providing health education to patients, yet such education is a necessary component of preventing chronic diseases.

Medicare and Medicaid

As health care costs have continued to rise over the last several decades so has the amount the U.S. government spends on this sector of the economy. Fuchs (2012) calculates that the government pays for about half of health care spending in the United States and that this percentage is continuing to increase.

The middle of the 1960s marked the beginning of federal government involvement in health care in a large way with the passage of the legislation creating Medicare and Medicaid. The Medicare program was established in 1965 as part of Title XVIII of the Social Security Act Amendments. It is focused on providing health insurance that covers many health care costs to Americans sixty five years of age and older and also to younger individuals with disabilities or end-stage renal disease. The Medicaid program was also established in 1965, through Title XIX of the Social Security Act

Amendments. This program is limited to providing insurance that covers health care costs for certain categories of individuals with low incomes, and it is now the largest health care payer for these individuals. Both programs are run by the Centers for Medicare & Medicaid Services (CMS). These two entitlement programs brought increased government money and regulation to the health care industry. Both the dollars and the regulation would grow and become more complicated over the ensuing decades.


A government program that provides health insurance to Americans sixty-five and over and younger individuals with disabilities or end-stage renal disease.


A government program that provides health insurance to many low-income individuals and families.

Figure 2.1 reveals the major problem underlying the Medicare program. As the population ages, the number of Medicare recipients increases while the number of workers who are paying taxes to support this government- financed program diminishes. One does not have to be an economist to figure out that before the program goes broke, benefits must be reduced, reimbursements for health services must be lowered, or workers must pay higher payroll taxes, or a combination of all three.

The cost of the Medicare program is paid out of the federal government's general revenues (42%), by payroll taxes (37%), and by premium payments by beneficiaries (13%). Owing to population growth among the elderly and expected increases in the cost of health care services for this group, the cost of this entitlement program is projected to go from $555 billion in 2011 to $903 billion in 2020. The Medicaid program is a mandatory, joint federal and state program. An additional program, the State Children's Health Insurance Program (SCHIP or CHIP) was enacted in 1997 by Congress (as part of the Balanced Budget Act of 1997) and is designed to provide coverage to uninsured, low-income children who are not eligible for the Medicaid program. SCHIP provides federal matching funds to states to provide this coverage. The Kaiser Commission on Medicaid

The Medicare Population Is Growing, but Fewer Workers Will Support This Population in the Future

Figure 2.1 The Medicare Population Is Growing, but Fewer Workers Will Support This Population in the Future

Source: Henry J. Kaiser Family Foundation, 2005b, fig. 7.6. Data from 2001 and 2005 annual reports of the board of trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance trust funds.

and the Uninsured (2013) points out that “Medicaid covers over 62 million Americans, . . . more than 1 in 3 children and over 40 percent of births. . . . More than 60 percent of people living in nursing homes are covered by Medicaid” (p. 1). Figure 2.2 shows the groups whose members may be eligible for Medicaid and the percentages of these groups that actually receive Medicaid funds for health care services. This figure clearly shows that decisions have to be made concerning the reimbursement of costs for nursing home care and the poor, especially pregnant women and low-income children.

State Children's Health Insurance Program (SCHIP or CHIP)

A joint federal and stale government program that provides health insurance to uninsured, low-income children not eligible for Medicaid.

The U.S. government is heavily involved in financing and regulating health care services and certainly shares the blame for the cost escalation and reduction in outcomes being experienced in the American health care system. The government has not done a good job of controlling the costs associated with entitlement programs, as can be seen by the fact that the three largest government programs – Social Security, Medicare, and Medicaid – are all approaching bankruptcy.

Longman (2012) argues that if we could affect the practice patterns in higher-spending hospitals and bring them in line with the patterns in lower- spending hospitals, we could retain or improve the quality of care and reduce the costs of Medicare by 30 percent. The higher-spending hospitals use more resources per patient than the lower-spending hospitals. If Medicare would use its financial muscle to accomplish this task, this program could

Percentages Covered by Medicaid Within Specific Groups

Figure 2.2 Percentages Covered by Medicaid Within Specific Groups

Note: "Poof is defined as living below the federal poverty level – $14,680 for a family of three in 2003.

Source: Henry J. Kaiser Family Foundation, 2005a. Data from Kaiser Commission on Medicaid and the Uninsured, Kaiser Family Foundation, and Urban Institute estimates; Birth data: National Governors Association, Maternal and Child Health Update.

be preserved into the far distant future. Medicare and Medicaid will be discussed in depth in Chapter Six.

The Chronic Disease Epidemic

As discussed in Chapter One (Table 1.2), in 1900, the leading causes of death in the United States were communicable diseases such as influenza, pneumonia, and tuberculosis, which usually resulted in death at a very young age because there were no effective treatments for these diseases. That all changed with the discovery of antibiotics in the mid-1930s and their subsequent widespread use. Many public health measures also came into play in the early 1900s, including better hygiene, greater access to clean water, and better food-handling techniques, lowering the chances of contracting a communicable disease. Communicable diseases have a short incubation period, the amount of time between exposure to the cause of a disease and the development of the symptoms of that disease. When a communicable disease occurs in large numbers of people, there is an immediate response by health providers and public health departments in order to discover the cause, treat the ill, and implement control measures in order to prevent the epidemic from spreading.

incubation period

The amount of time between exposure to the cause of a disease and the development of disease symptoms.

This type of response does not work very well against chronic diseases, for various reasons. As we have been discussing, the leading causes of death in the United States today have become chronic diseases such as heart disease, cancer, stroke, and diabetes. These diseases have long incubation periods, have multiple causes, and usually cannot be cured. Often complications arise from their presence over long periods of time. Health providers and public health departments do not have to look for an immediate cause because their causes are long term and they are not infectious; also, they cannot be thoroughly treated because there is no cure. Another major difference between communicable and chronic diseases is that people often cause their chronic diseases through their practice of high-risk health behaviors.

For example, according to the Centers for Disease Control and Prevention (2011), during the period from 2005 to 2008, approximately 35 percent of the U.S. population aged twenty years or older had prediabetes and 26.9 percent of the population sixty-five years or older had diabetes. This epidemic has continued to grow, and diabetes is now the leading cause of kidney failure, nontraumatic lower limb amputation, and new cases of blindness in the United States. Over 90 percent of individuals with diabetes have type 2 diabetes, which is largely a result of poor personal health behaviors like overeating, poor diet, and lack of physical activity. Unfortunately, these high-risk health behaviors not only lead to diabetes but also usually lead to the serious health complications mentioned earlier as people age.

The chronic disease epidemic must be better understood by providers of care and health policymakers before it becomes the most dangerous and expensive epidemic ever to be faced by the U.S. system of health care delivery. It is dangerous and expensive because these incurable diseases usually result in disability and quite often in premature death as well. Morewitz (2006) reports that individuals with chronic diseases are often unable to work, experience a decrease in quality of life, and incur significant medical costs as they grow older and experience the many complications typical of these diseases.

Figure 2.3 outlines the path of a typical disease such as heart disease, cancer, or diabetes. The patient quite often is the first to recognize symptoms of disease and usually then begins to seek information from friends, family, and now the Internet The patient then proceeds to visit the family physician, who begins examinations and testing to determine the medical problem and give it a name. This primary care physician will then begin referring the patient to a number of specialists in an attempt to verify a diagnosis and begin a series of attempts at treating the disease once the stage of illness is determined. When a chronic disease is determined as the cause of illness, the process of referral to specialists may be never-ending, and the patient may have increasing numbers of drugs to take each day. He or she also has the constant worry of complications that may result from the disease.

Chronic diseases thus usually require an approach much different from the one the medical system is currently designed to provide. Because there is usually no complete cure available, these diseases require more numerous episodes of care than communicable diseases do. Another major problem with chronic diseases is that often an individual has more than one of them, requiring coordination of care (typically by the primary care physician) among multiple specialists and medications. Chronic diseases are going to require the adoption of new methods of treatment in which patients are more active participants in order to improve the quality of care while also reducing the costs of treatment. Some very important innovations in the care of these diseases are coming from other countries. Richman, Udayakumar, Mitchell, and Schulman (2008) argue that health

The Disease Path

Figure 2.3 The Disease Path

care found in some other countries is capable of achieving outcomes similar to those of the United States, but at 10 percent of the cost. For example, these authors found open-heart surgery similar in quality to that found in the United States being performed at Fortis hospital in India for $6,000, compared to $100,000 in the United States. The major reasons for lower costs in India involve scale and organizational efficiency along with better coordination among providers, which is lacking in the United States. Encouraged by health care executives, many of whom are physician leaders, and their managers, medical team members in India encourage continuous innovation in the way health care services are delivered to their customers. This is a demonstration that quality and lower costs are compatible in all industry segments, including health care.

coordination of care

Having one person responsible for organizing all of a patient's care to avoid errors and duplication and ensure the right treatment at the right time.

In brief, chronic diseases currently affect over half of the U.S. population, cost over a trillion dollars a year, and are for the most part the result of individuals' own high-risk health behaviors. The number of Americans suffering from chronic diseases is certainly going to rise in an aging population, and the costs of these diseases will continue to rise into the distant future. The increased aging of the U.S. population is only going to make this chronic disease epidemic larger and cause it to consume a greater percentage of the resources devoted to health care. Because a vast number of individuals with chronic diseases and their complications are over age sixty-five, this epidemic will place further strains on the Medicare program. Fineberg (2012) points out that in 2001, 5 percent of Medicare recipients accounted for 43 percent of the program's expenditures, and 75 percent of these individuals had one or more chronic diseases. It seems obvious that the answer to controlling health care costs while improving the overall health status in this country is to be found in the control of chronic diseases. This new epidemic of chronic diseases is going to require an entirely different approach in which resources are focused more on the prevention of disease through health education than on the management of disease. More will be said about the chronic disease epidemic in Chapter Twelve.

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