Why Health-Care Costs Keep Soaring

By Howard Gleckman

It's that time of year again. Across the country, workers are opening envelopes announcing they have to renew their health insurance. This year, when you look at the not-so-fine print, brace yourself again. Premiums are up -- often by double-digit rates. Co-payments are up. Costs for prescription drugs are up, especially for brand-name products. It would be sticker shock -- except after so many years of this, it's more depressing than shocking (see BW, 10/20/03, "Get Used to the Pain").

What's going on? Why are health-care costs skyrocketing when overall inflation is well below 2%? And when will it stop? Here are the answers to some key questions:

Are health-care expenses really up that much?

Did the Cubs choke in the playoffs? As a society, total health-care spending is rising at about 7.3% a year. Overall, Americans will spend nearly $1.5 trillion on medical care this year -- that's almost 14% of total gross domestic product. As a share of the economy, the U.S. spends more than any other country in the world.

But why?

To start, Americans are getting older, and as that happens, more care is needed. It shouldn't be any surprise that the country is spending more each year on health care. As 77 million baby boomers advance in years, costs will continue to rise.

But isn't it a good thing that people are living longer?

Sure beats the alternative. But it has a downside: As folks get older, they get sicker. The fastest growing population group in the country is 85-year-olds. And, unfortunately, the very old eat up health-care dollars faster than anyone.

O.K., so you can't beat demographics, but what about technology? Won't it help reduce costs?

In your dreams. Technology is increasing health-care costs, not cutting them.


Simple. Many high-tech medical procedures are less invasive and often cheaper than the older technologies they replace. So more Americans use them, and overall costs go up.

Wait a minute. First, you said technology was increasing costs, now you say it's lowering them. I'm confused.

Medical technology is no different than consumer electronics. When DVD players cost $500, few people bought them, so total spending on the devices was insignificant. Now that they cost $50, everyone is buying. As unit costs fall, total spending rises. Same thing with health-care technology. As it gets less expensive, more and more people avail themselves of it.

But what does that have to do with health care?

Take cataract surgery. Thirty years ago having a cataract removed meant spending hours in an operating room and three days recovering in a hospital. Today, it's performed as a 30-minute outpatient procedure. The inflation-adjusted cost of removing cataracts is no more than it was in the 1960s, but millions more people are having it done. Americans now spend $4 billion a year to have cataracts removed. Then there's the Botox effect.

Excuse me?

A whole new world of medical technologies offers treatments and procedures that were unimaginable a few decades ago. And a massive industry of drug companies, doctors, and hospitals are trying to convince everyone that they need all that fancy new care. Botox injections remove age wrinkles and worry lines. Lasik eye surgery gives patients 20/20 vision in the blink of an eye. A broad range of diagnostic tests such as MRIs pinpoint maladies without surgery. And dozens of pharmaceutical drugs do everything from reducing cholesterol levels to alleviating symptoms of heartburn.

Ten years ago, few people ever heard of acid-reflux disease, and little could be done to treat it. Now, Americans spend more than $8 billion annually on drugs such as Prilosec for heartburn. And when insurance pays, Americans want it all.

Speaking of insurance...

Never thought you'd ask. Insurance pays roughly three-quarters of all health-care costs in the U.S.. And unlike auto or homeowners' insurance, much of it is up-front, first-dollar coverage. That insulates consumers from the real cost of care and breaks the normal link between between price and demand. You're a lot more likely to think twice about visiting a doctor if you're going to pay $85 than $10.

What about premiums?

Some evidence shows that high insurance premiums may be unsustainable. A new study by the Kaiser Family Foundation and the Health Research & Educational Trust reports that last year claims expenses were up about 12.4%, but premiums rose 15.6%. That's a sweet little underwriting profit for the insurers. But as competition grows in profitable markets, those margins will narrow.

And what about other health costs. Are they going to keep rising?

Bet on it. Experts say some big hikes may moderate a bit over the next few years as more low-cost generic drugs come onto the market and as new insurance plans force consumers to swallow a bigger portion of medical expenses. But that's just slower growth. In the long run, the aging population will continue to drive overall costs skyward.

Bottom line, is all this spending making Americans healthier?

That's the $1.5 trillion question. Though the U.S. spends far more per person on health care than any other country, life expectancy here is actually a bit below the average for major industrialized nations. The real question is not how much is spent on medical care but whether those dollars are spent as wisely as they should be.

Gleckman covers health-care policy as a senior correspondent in BusinessWeek's Washington bureau.

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