When compared to other developed countries, the United States spends more money on healthcare and has a lower quality of health outcomes. Also, medical care prices increased 4% in 2016 and have been outpacing the general rate of inflation for some time now. That might make you wonder why healthcare is so expensive and what is driving the continued increase in costs. While there is no single cause to point to, there are some primary factors that are influencing your healthcare costs.
This is the first post in a series of posts about what influences the cost of healthcare. In this post, we will outline four areas that can increase healthcare costs, and we will go into detail of each area in future posts. Enjoy!
Administrative Costs
It is estimated that administrative costs contribute to 25% of all healthcare spending in the U.S. Often these costs are created by the extensive amount of coding, billing, and similar activities between private payers, insurance companies, the government, and hospitals. Hospitals have to increase the cost of services to cover salaries and benefits for staff who perform non-patient care related jobs.
Defensive Medicine
The term defensive medicine refers to the practice of physicians ordering medical tests and procedures that might not be necessary or useful in order to make it more difficult for a patient to sue. Research says that up to 75% of doctors order more testing and medicines than medically necessary to avoid potential lawsuits. This adds up to about $650 billion annually in additional healthcare costs that are medically unnecessary. Consider that it is easier to sue doctors in the US than in most other countries.
Pharmaceutical Companies
It is no secret that pharmaceutical companies in the U.S. make more money than similar countries around the globe. Between 2003-2013, U.S. pharmaceutical companies brought in 42% of pharmaceutical sales worldwide. This compares to 58% from the rest of the world. For instance, a standard dose of a medication called Abilify costs $40.51 in the U.S. The same pill in Canada costs $4.33.
Why is this? Well, the U.S. and pharmaceutical companies have reached some sort of unwritten agreement. Basically, pharmaceutical companies increase the costs of medications in order to fund research for further advancements in medicine. It is estimated that 17% of their total revenue goes towards research.
Third Party Payer
The whole U.S. healthcare insurance system is built around the third party payer. This means there are three parties in the equation: the patient, the healthcare provider, and the insurance payer. Some argue this system doesn’t work and here is that argument. First, the patient who is receiving the services isn’t concerned about the costs, or they are only concerned to a certain extent. Depending on the patient’s coverage, she doesn’t have to pay or only pay a specific amount, then her insurance provider covers everything else. When patients aren’t liable for most of the costs, they generally spend more because they aren’t paying for most of the services they are receiving.
The health provider isn’t concerned with the costs for services either. Their main goal is to make sure they get paid for the services provided. Since the provider isn’t concerned about the costs of the tests or procedure being ordered, they order some that may or may not be medically necessary and bill the insurance provider whatever they want. And why not? The patient or the provider aren’t paying for it.
Lastly, the insurance provider gets a large bill for a variety of tests they are supposed to cover. If you multiply this scenario over millions of patients, insurance companies cannot function because they will not profit enough to maintain business.
As you can see, this system leaves little accountability for the patient or provider. But the insurance companies aren’t left out to dry. They pay for the patient’s care, so the provider only gets paid if the insurance covers the services provided. This leads to negotiations between healthcare facilities and insurance companies.
If insurance companies refuse to pay for services then the healthcare facility is left to the cover the bill. Insurance companies have started to increase physician accountability by requiring justification for testing otherwise they will not pay out. Hospitals sometimes will increase the costs of services in order to help their negotiations with insurance companies.
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Unfortunately, these negotiation processes lead to unaffordable healthcare costs that hurt the uninsured or those who have high deductibles.
Many factors are driving up healthcare costs and there is no single solution to fix the problem. Hopefully, with the national spotlight turning to healthcare, our country will find solutions to these problems which will make healthcare more affordable for everyone.