The Soaring Cost of Health Care in the U.S. and Current Cost-Cutting Initiatives

Overview

The U.S. Commerce Department’s Bureau of Economic Analysis recently announced that health care spending rose by 9.9% in the first quarter of 2014 -the largest quarterly increase in more than 30 years. It subsequently tapered off to register an increase of 5.5% for the whole of 2014, compared to 2.9% for 2013.

Furthermore, the total United States spending on health care is estimated to rise to $4.8 trillion by 2021, up from approximately $3 trillion in 2013 ($9,523 per person), and up from $70 billion in 1970. By 2021, that level of expenditure would translate to one fifth of the U.S. economy (20% of GDP, up from 17.5% in 2014).

Growth Breakdown in 2014

The rapid growth in the cost of medical care in 2014 is attributable mainly to the significant coverage expansion brought about by the Affordable Care Act (ACA), as represented by Medicare and Medicaid:

Medicare: This accounts for 20% of total healthcare costs. In 2014, Medicare grew by 5.5% (to $619 billion), attributable to the 12.2% growth in prescription drugs, to the net cost of insurance, and to the rise in government administrative expenditures.

Medicaid: That accounted for another 16% of total healthcare costs. After growing by 5.9% in 2013, Medicaid costs rose by 11% in 2014. This broke down to less than 1% for local and state spending, and to more than 18% for Federal expenditures.

Identifying the Drivers of Rising Costs

Lifestyle issues: We are older, fatter and arguably more stressed than ever before. The resulting increase in the prevalence of chronic disease, together with the accompanying rise in demand for new and expensive medical technologies and pharmaceuticals, account for more than two thirds of the rise in overall costs.

Low consumer-sharing: An estimated 20 to 30 percent of all health spending goes to waste or on redundant care. Much of this inefficiency stems from the health care industry’s opaque and multi-layered structures. On the one hand, we never get to fully understand what health options are best for us and how much they cost, while on the other, we are insured and therefore lacking in incentives for making cost-saving decisions regarding our use of medical services.

Reforming the Fee-for-Service System (FFS): In the FFS system, payers reimburse providers for all services rendered, irrespective of their bearing on patient health or overall patient outcomes.

Fees are unbundled and submitted separately, paving the way for physicians and other providers to offer more treatments since reimbursement is based only on quantity of care. In addition, because of their precautionary adherence to providing defensive medicine, providers moreover tend to subject patients to endless tests, with no concern for cost.

FFS is thus unanimously tagged as an antiquated and out of control driver of soaring medical costs. As a result, there has been a concerted effort, mostly by Medicare and the health insurance industry, to replace it with evidence-based health care and a system that better incentivizes quality.

“Paying for performance” however requires that providers be able to have real-time coordination with other members of each patient’s medical teams and data-driven assessments which, in turn, begs for more state-of-the-art technologies.

Accountable Care Organizations (ACOs) thus became one of the most favored options for effective new models of care.

Examples of new reimbursement models that are underway include:

Fighting Back

Based on figures that can be derived from Medical Expenditure Panel Survey (MEPS), approximately 80% of health care expenditures are linked to the chronically ill, i.e. patients with short-term, “inflexible” medical needs. While fraud, unnecessary testing and other reform programs can still reduce the cost of caring for this category of patients, prevention techniques are relevant only in the mid-to-long term.

And since there is no single recipe for the management of the soaring cost of medical care, stakeholders recognize that much common ground has already been identified and effective reform methods embraced.

Stepping away from the fee-for-service method of reimbursing providers has become one of the two top priorities in the fight against spiraling costs, the other being the widespread efforts by many corporations to provide their employees with abundant incentives to look after their own health.

Sponsors of this method are betting that preventive techniques will keep workers productive and help them remain out of the grip of costly diseases like hypertension and diabetes.

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