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The Cost of Health Care—Why Is Health Care So Expensive?

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Updated September 26, 2013

The Cost of Health Care—Why Is Health Care So Expensive?
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Most of us don’t understand why health care is so expensive. We know the cost of health care takes up an ever-larger portion of our gross domestic product. But, why is the cost of health care growing faster than inflation?

A 2005 poll by the USA Today/Kaiser Family Foundation/Harvard School of Public Health showed that Americans thought greedy pharmaceutical and insurance companies, and medical malpractice lawsuits were the most important factors contributing to the rising cost of health care.

Those Americans were wrong. While there are several things that contribute to the rising cost of health care, one of them overshadows the rest.

A single factor causes half the rise in costs

Accounting for more than half the increase in cost, the single largest factor underlying rising health care costs is technological advances in medical care. Thanks to medical advances, we can cure or treat conditions that used to kill us. But, those new treatments come with price tags.

For example, the entire field of organ transplant medicine has evolved since the late 1960’s. If you needed a heart transplant in 1965, you died. Now, if you are lucky enough to have a donor, hundreds of thousands of dollars later you have a new heart.

Less sensational, joint replacements have become commonplace in the past few decades. It’s not uncommon for one person to have multiple joints replaced, or to have the same joint replaced multiple times.

But, advances in surgical techniques aren’t the only advances in medical technology increasing the cost of health care. The entire field of recombinant DNA biopharmaceuticals has evolved since the 1980’s. For example, Enbrel, an injection used to prevent the crippling effects of rheumatoid arthritis and ankylosing spondylitis, costs around $20,000 per year.

It isn’t just the cost of the new technology itself, either. It’s also cost of continuing to provide health care to someone whose life was extended by one of these new technologies.

Take heart disease as an example. Years ago there were nitroglycerine, oxygen, and morphine. If you were a 50 year-old man who had a heart attack, you weren’t likely to survive many more years because technology to adequately treat the disease didn’t exist.

Now, you might be placed on a statin like Lipitor long before you have the first twinge of chest pain. Your onset of symptoms might be delayed for years. If you eventually develop symptoms, you can be treated with things like angioplasty, stents, and bypass surgery, potentially extending your life for decades.

But, the cost for those extra decades isn’t just the cost of the Lipitor and the stent. It’s also the cost of all the other health care you received because you lived decades longer. If you had died at age 50 from your heart attack, you wouldn’t have needed a knee replacement when you were 62 years old. You wouldn’t have been treated for prostate cancer when you were 70 years old. All of those health care costs were incurred as a direct result of the advances in medical technology that allowed you to live long enough to need treatment for other things.

What about the other 50%?

Although advances in medical technology are responsible for about 50% of the increase in the cost of health care, there’s still the other 50% to be accounted for. Much of the rest of the cost increases are due to increasing personal incomes and expanded health insurance coverage. Both of those factors create an increased demand for health care. Wealthier people can afford more health care, so they use more health care. People with health insurance are insulated from the burden of the true cost of health care, so they consume more health care.

Waste, fraud, and abuse, as well as changes in demographics like the aging of the population and the rise of obesity rates also contribute to the escalation of health care costs. But nothing even comes close to the impact of advances in medical technology.

Why does the increasing cost of health care matter?

Health care spending in the United States went from 4.7% of GDP in 1960 to 14.9% of GDP in 2005. Now, it’s even higher. If health care costs continue to suck down an increasing portion of our nation’s income each year, it will eventually become unsustainable. Meanwhile, it makes us less competitive in the global marketplace.

In a March 1, 2010 CNBC interview, billionaire investor Warren Buffett compared our increasing health care costs to a tapeworm, saying "everything we produce for export, everything we compete with . . . is bearing that cost . . . ."

What can we do about it?

We don’t want to stop the development of new medical technologies, even though they cause health care costs to rise. Advances in medicine are generally a good thing.

Instead, we should use comparative effectiveness research to carefully weigh the benefit of each new technology against treatments we already have. We need to see if the new technology really treats the problem better than older technology did. If so, is that benefit consistent with all patients? Or, are certain groups of patients better off getting the older treatment? Right now, we don’t have enough information about the comparative effectiveness of different treatments to make fully informed choices about which treatments are best in which situations.

Additionally, we should eliminate or control waste, fraud, and abuse. We should encourage lifestyle changes to decrease obesity rates. And, we should provide more transparency in the cost of health care services so individual consumers have a more accurate idea of how much each health care service they’re using actually costs.


Sources: Health Care Costs: A Primer by The Henry J Kaiser Family Foundation, Technological Change and the Growth of Health Care Spending by the Congressional Budget Office, The Long-Term Outlook for Health Care Spending by the Congressional Budget Office.

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