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Where Do U.S. Health Dollars Go? (Page 2)

The Rising Cost of Care

Not only is our health care system more expensive, the rate at which our bill is increasing outpaces growth in other countries.

Several predictable factors are responsible for our high growth rate.

At the same time, some of the commonly cited, “usual suspects” may not be as relevant as you might think.

Which of the following lead to increased spending?

  • Medical technology? Yes. The contribution of medical technology to health care spending growth ranges from between 38-65%.
    • Newer technologies allow us to replace older, less costly treatments with more expensive remedies.
    • Technology also makes a wider range of treatment options available.
  • Medical malpractice? No. Medical malpractice is not a major driver in spending growth.
  • Obesity? Yes. Obesity accounts for roughly 12% of spending growth.

Reducing obesity may help to cut costs in the short-term, but many of these cost-savings might ultimately be offset by increased longevity and the cost of diseases that are more prevalent during old age.

  • Demographics? No. The general aging of the population does not increase the growth rate.
  • Low Productivity Gains? Yes. Low productivity in the healthcare sector results from:

Lack of price competition among health providers because of third-party payers, and payment policies that reward number of services performed over the quality of care given.

Decreasing the ranks of the uninsured? Yes.

  • This one may seem to be counterintuitive. We often talk about how uninsured individuals rely on the emergency room, which drives up the cost of premiums and services.
  • This occurs because insurers and providers are often not reimbursed for the ER visits of the uninsured, so they recoup their costs by requiring paying customers to fork over additional dollars.
  • It would seem to make sense, then, that insuring more individuals would lower the cost of care for everyone, as there would be presumably less uncompensated visits to the ER.
  • In fact, however, insured individuals tend to seek out and utilize more care, in the form of doctors’ visits, tests and other services, and the newly insured are no different. This offsets the gains from reduced reliance on the ER and leads to an increase in spending growth.

So where do our health care dollars come from, and where do they go?

The following two pie charts from the Centers for Medicare and Medicaid Services (CMS) illustrate the answer.

The Nation’s Health Dollar, Calendar Year 2007:
Where it Came From


Other Public includes programs such as workers’ compensation, public health activity, Department of Defense, Department of Veterans Affairs, Indian Health Service, State and local hospital subsidies and school health.

Other Private includes industrial in-plant, privately funded construction, and non-patient revenues, including philanthropy.

NOTE: Numbers shown may not add to 100.0 because of rounding.

The Nation’s Health Dollar, Calendar Year 2007:
Where it Went


NOTE: Other Spending includes dentist services, other professional services, home health, durable medical products, over-the-counter medicines and sundries, public health, other personal health care, research and structures and equipment.

SOURCE: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group.

As you can see, hospital care and physician payments eat up the largest proportion of health dollars, while prescription drugs, nursing home care, and program administration each consume 10% or less of health spending.

Given all the hype about the drain of administrative costs on our system, you would think that we spend more than 7% of our total healthcare dollars in this area. And you would be right. The 7% in the chart only represents the administrative costs of private insurers. Click here for a breakdown of the hidden overhead expenses paid by providers, lobbyists and drug companies.

It is also important to recognize that we, the American people, pay for the majority of health care costs, whether directly through insurance premiums and out-of-pocket expenses, or indirectly through taxes for public programs and through reduced wages from our employers.

In other words, it is in our best interest to advocate for policies that reduce the total bill.

Bottom Line

What we can do to reduce the cost of our health care system:

We must control the costs generated from new technology.

As we showed in this post, not all new technologies drive spending growth. In fact, some technologies increase efficiency by reducing the amount of time it takes to make a diagnosis, or by decreasing the required length of an in-patient hospital stay.

That said, we tend to overuse newer technology, which includes everything from name-brand prescription drugs to expensive tests like CT scans and MRIs.

These technologies have the incredible potential to improve a patient’s health and chance of survival in select cases. At the same time, they are also used in cases where they may not provide a significant advantage to the patient (and may even cause harm).

  • Solution 1: We need to conduct unbiased cost-effectiveness research to determine high and low-value yields for various technologies, make the findings known and then advise or mandate that providers only use newer technologies in cases where research has shown that the patient will benefit significantly as a result.
  • Solution 2: Policymakers are also attempting to revise our fee-for-service payment system. Physicians and hospitals are currently reimbursed for every procedure or test that they administer, which promotes the overuse of expensive technology as a way to recoup costs and increase salaries. Instead, physicians might be paid a set salary that would cover all of the tasks of caring for patients.
    • This second solution would also go a long way towards reducing the inefficiencies in our healthcare system that result from the overpricing of tests and services.

In a future post, we will examine the other spending drivers in our healthcare system- obesity and administrative costs- and look at ways to address those issues.

This article was written by Julia Nagle.

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