Georgia Zachopoulos
MPHP 429
Current Trends in Health Care
Costs
Chapter Outline
I. Introduction – explanation of trends in cost
III. New Medical Technology
IV. The Rise of New “Blockbuster Drugs”
V. Increasing
Consumer Demand and Supply
VII.
Mandates
and Litigation
VIII. Conclusion: Containing Health Care Costs
How much should you pay to save a life?
Ethically, this is a question that should never be asked yet in the United
States, even though indirectly, it is asked constantly. The average cost for
cancer treatment is near $60,000 (1). Triple drug antiretroviral cocktails used
to treat HIV average $12,000 per year (2). The accumulation of costs for a heart
attack victim from hospital admission to discharge is $23,000 (3). In this
country, healthcare is a big business. The ability of local hospitals and
providers to cover health care costs for those who do not have the means to pay
does not exist. As a result, health care services are guaranteed for and
received by those who can afford them and can show how medical costs will be
paid. From an economic perspective, the health care arena is a market- and
demand-driven industry where the patient is the consumer. One of the top
reasons for personal bankruptcy is an inability to cover the costs of health
care expenditures (4).
Currently, approximately 13% of the US GDP
(Gross Domestic Product) is spent on healthcare (5). As a result, healthcare is
distinctly the largest industry in the US economy. One trend is that the
expenditure on healthcare in the US has continued to grow over time as
evidenced in Table 1. The table shows that the National Health Expenditure
(NHE) in 1960 was $26.9 billion, or 5.1% of the GDP, and escalated to $1.149
trillion, or 13.1% of the GDP, in 1998 (5).
Table 1
In relation to
other countries, the US spends the most on health care, in both dollars and in
the total share of economic activity. According to the Organization for
Economic Cooperation and Development, while the US spends roughly 13% of its
GDP, Switzerland spends 10.7%, Germany spends 10.6%, Canada spends 9.1%, Japan
spends 7.8%, and the United Kingdom spends 7.3% (6). Even though the high
expenditure in the US may be equated with superior medical treatment, in terms
of life expectancy and infant mortality, the health of the average American is
below that of other industrialized nations. Data from the WHO in Table 2 show
that in 1997, the US ranked 37th in health system performance in
comparison to other major nations (5). The health system performance rank is an
indicator of health service provision. It assigns all of the world’s 191
countries a rank beginning with 1 according to a summarized comparison of
health systems performance and attainment of health systems goals for each
nation1.
TABLE 2
Furthermore,
the Congressional Budget Office (CBO) estimates that in the year 2008, the NHE
will reach $2.055 trillion. This estimate amounts to encompass 14.4% of the
GDP. Table 3 summarizes the CBO projections on health expenditures (5).
TABLE 3
:
All the data presented thus far lead one to ask why has
spending on healthcare increased so drastically over time while the quality of
and reception of care provided has not increased in parallel? The intent of
this chapter is to outline the main factors that have contributed to increases
in the costs of medical services and spending. By presenting these factors, it
will help one to understand how they interplay with one another and help to
answer the question posited. The factors contributing to the increases in
spending on health care that will be presented in this chapter include 1) the
shift to managed care, 2) new technology, 3) the rise of new “blockbuster drugs”,
4) increasing consumer demand and rising incomes, 5) the aging population, and
6) increasing mandates and litigation. Important to note is that one may bring
about the point of general inflation in the economy, yet over the past 40 years
there has been a significant drop in the average annual rate of inflation by
decade. For instance, in the 1960’s the average inflation rate was 5.46% while
in the 1990’s it was 1.57% (16). The impact of these factors on the costs of
health services far overrides that due to inflation alone2.
Shift to Managed Care
Although the federal and state
governments finance programs such as Medicare, Medicaid, TRICARE, and VA
systems, the majority of healthcare in the US is delivered by the private
sector. Although roughly between 40 and 45 million Americans are uninsured in a
given year, the 250 million remaining are. Most Americans have changed over
from traditional fee-for-service health plans to managed care health plans in
the form of PPO’s or HMO’s that are sponsored by employers. Although strict
managed care plans were initially introduced to drive down medical related
expenditures, consumers rebelled against restrictions such as those on choosing
doctors and hospitals within networks. There was a resultant drop in spending
in the early and mid 1990’s with the introduction of managed care as depicted
by the annual change in spending by the private health sector per capita,
dropping as low as 1.1% below the average (8). However, a subsequent increase
in spending has occurred in successive years, currently climbing up to
approximately 3% above the average3.
Such managed care plans remove the
patient as the major decider in financial and medical choices that are instead
made by others in the name of the patient. Even Medicare, Medicaid, and tax
laws provide incentives for individuals to have employers pay for medical care
through private insurance. Because an increasing portion of medical bills are
paid by third-party payers, (insurance companies and governments) patients
overuse medical resources because they appear to be free or next to free as all
they have to worry about are small co-pays and only pay a portion of
prescription drug costs. When these consumers do not have to pay the entire
cost of the medical services they use, they rationally respond with overuse.
They demand more brand name drugs and new costly medical procedures and
life-saving treatments. As a result, insurance premiums for employer-sponsored
health benefits are increasing. Hewitt Associates approximate that the average
amount companies will pay per employee in 2003 to provide health care is $6,925
(9). This figure has increased $839 since 1998.
There are a few strategies that have
been suggested for employers to implement to contain insurance costs. The first
is to educate their employees on the true costs of health coverage beyond the
average $15 co-pays through education on the use of generic drugs and enhanced
self-care and prevention. Another strategy is for employers to provide health
promotion programs. Yet another strategy is to share the cost with employees
and increase employee health care premiums. The psychology behind this strategy
is to encourage workers to become more aware of medical costs and minimize
unnecessary medical visits.
New Medical Technology
Innumerable breakthroughs have
resulted from scientific research in recent decades. There are obvious and
unquestionable benefits from the discovery of new diseases, conditions, and
medical treatments that have extended the lives and improved the quality of
life for countless individuals. For instance, advanced imaging tests such as
ultrasounds and MRI’s allow for the recognition and treatment of previously
untreatable conditions. Minimally invasive surgical techniques allow for less
trauma and healing time to the patient. Innovative drugs such as superstatins
used to treat hypercholesterolemia allow patients to tolerate medications or
therapies with greater efficacy and fewer side effects. Yet, as biomedical
technology continues to advance at an accelerated pace the cost and demand for
each one of these technologies skyrockets. Both consumers and physicians need
to be mindful of the cost-effectiveness of sophisticated medical procedures.
On the other side of the token, oftentimes
new test procedures or interventions are not necessary or more effective than
what is standard. Ductal lavage is a new test that is used to analyze a woman’s
breast cells to provide at best a rough estimate of her risk for developing
breast cancer. The cost of this procedure is $700 (10). A new drug has been
introduced to treat leukemia called Gleevec, yet at even a cost of $12,000 it
is not a cure (10). An artificial heart being developed by Abiomed intended for
patients who are in end-stage heart failure has a price tag of $100,000 for the
apparatus alone (10). A study conducted by physicians at Johns Hopkins
University School of Medicine published in The
Journal of American Medical Sciences analyzed the cost and efficacy of the
use of spiral computerized tomography (CT) to scan for lung cancer. The spiral
CT scan works by radiating spirals of low-dose x-rays around the body of a
patient traveling through a metal tube. Although studies have shown that CT
scans better detect small and easily treatable tumor, they are also less
specific and produce more false positive results. The study found that if
current or former smokers were scanned once a year beginning at the age of 60
over 20 years there would be 553 fewer deaths but there would also be 1,186
unnecessary biopsies (11). The price of a CT scan is $500 in comparison to $50
for a routine x-ray and thus there is no societal benefit for the use of spiral
CT to screen for lung cancers in terms of cost (11).
The
Rise of New “Blockbuster Drugs”
Doctor’s
offices and are not only crowded with sick patients but also with drug-company
sales representative known as detailers that leave drug samples and waiting
room tables overflowing with pamphlets highlighting brand-name drugs. The IMS
Health drug-market research firm in Westport, Connecticut determined that in
the year 2000 pharmaceutical companies spent $4.8 billion on detailing,
detailers made 61.4 million office visits, and the pharmaceutical industry
spent $2.5 billion to advertise directly to the consumer through television and
magazine ads (12).
The National Institute for Health Care
Management Research and Educational Foundation based in Washington D.C.
conducted a study on prescription drug spending. The study found that a mere 50
of the 9,482 drugs on the retail market are responsible for the greatest
proportion of the increase in prescription drug spending which rose from $131.9
billion in 2000 to $154.5 billion in 2001 (13). Some of the drugs that top the
list include Prozac and Celex to treat depression, Lipitor and Zocor to treat
cholesterol, arthritis drugs such as Vioxx and Celebrex, and Oxycontin as a
pain reliever. The average cost of one
of these 50 best selling prescribed drugs is approximately $70 while the
average price of the remaining drugs is approximately $40 (13). Therefore, the
increased use of these few and expensive “blockbuster” drugs lead the rise in
pharmaceutical expenditures.
Overall, pharmaceutical costs account for
10% of healthcare spending (5). Over the past decade, the pharmaceutical
industry has reported profits that are three times the size of those reported
by other fortune 500 industries. Patients are captured by the advertisements
for these drugs and demand them from their doctors. The pharmaceutical industry
has so effectively advertised that doctors often fear for their reputations if
they decline to prescribe these drugs and are hence often compelled to succumb
to requests for these drugs in place of alternatives. The end result is that
doctors are writing more prescriptions for the most expensive and heavily
marketed drugs. Although consumer advocates and politicians criticize this
trend, economists and pharmaceutical makers claim that these drugs save both
lives and dollars. One stance they take is that these medications allow people
to live longer lives of a better quality out of hospitals leading them to
beneficially contribute to society. Another claim they make is that more people
are being treated for diseases that have been under-diagnosed, reflecting the
increase in spending. Lobbying groups such as the Pharmaceutical Research and
Manufacturers of America (PhRMA) state that of the 17 million people suffering
from depression only 6 million receive treatment and 28 million are not
receiving needed medication for high cholesterol (14). They also state that new
drug therapies eliminate the need for more expensive care and that employers
and government officials who are responsible for paying the majority of medical
bills should realize that spending on costly medication is an investment that
ultimately results in fewer worker sick days.
As these blockbuster drugs are vital to
manufacturers’ profits, drug companies extend patents and introduce new drugs
that are similar to their predecessors to continue to profit. Instead of taking
costly risks to develop new drugs, companies are creating “me-too” drugs based
on predecessors that have gone off patent. One example of such a drug is
Clarinex manufactured by Shlering-Plough and modeled after the antihistamine
Claritin. Another example is Nexium that AstraZenca spent $126 million to
promote prior to the patent expiration of its predecessor heartburn medication
Prilosec (14).
In an attempt to curb the high costs and
spending on medications, states across the US, such as Florida, Alabama,
Arkansas, Maine, and Michigan, are partaking in counter-detailing efforts.
These efforts educate physicians on prescribing more generic than brand-name
medications. They also include scans of millions of doctor’s prescription
records to hone in on who is heavily relying on prescribing blockbuster drugs.
Increasing Consumer Demand and Supply
On
the exterior, the health care industry resembles every other industry in
regards to profit margins, investments, and losses. However, it is very unique
in that demanding consumers do not pay directly for services received. Instead
a third party such as the government or insurance provider covers a portion of
the costs. The supply of health care is also unique in that consumers rely on
information given to them from providers who are heavily regulated. A greater
demand for health services than supply of health services is directly
responsible for increasing the costs and prices of health care. A major factor
in the shift of the demand curve for health care services is rising incomes.
From the perspective of economists, health care spending per capita increases
proportionately with increases in per capita income. Rising incomes increase
accessibility and expectations regarding medical services and advances. With
higher incomes, consumers have more freedom and power in the market and
therefore begin to demand the latest high cost drugs and procedures. Also,
consumers are more frequently turning to alternative treatments not previously
covered by insurance plans.
Although the supply curve has also mimicked the increasing trend
of the demand curve for health services, the rate at which this increase is
occurring is less than that for demand. One reason for this is that physicians
represent nearly 0.2% of the population while they direct approximately 10% of
the spending in the US (5). The supply of doctors remains relatively constant
because of the high barriers to entry into medical schools, the length of time
required to receive training, and the financial burden of receiving a medical
education. Another reason is that the provision of health care services is
extremely labor intensive and requires specialized workers such as nurses and
technicians. In order to increase productivity, hospitals need to hire more
trained staff and purchase more medical supplies, which increases the amount of
money hospitals spend on labor, wages, and extra costs. Indeed hospital
spending is on the rise, as it increased to 16.3% in 2001 from 11.2% in 2000
and from 8.9% in 1999 (15). Ultimately, the costs for health services are
driven upwards to cover these expenditures, causing a rise in hospital
inpatient spending.
Adding to the expenditures of hospitals are
technological advancements that increase the quality and quantity of health
services provided. While the number of administrators has increased an
astounding 40% over the past few decades, the number of physicians has
disproportionately increased by less than 10%. In addition, another category of
excess cost is enwrapped in administrative and paper work costs. These costs
have no benefit on the quality of health care but have emerged because of the
network of third-party payers and their efforts to control costs by keeping a
watchful eye over the behaviors of doctors and patients. In an effort to
contain costs, counterproductively these activities continue to force costs up.
Physicians have been under the watch full eye of administrators because they
frequently order unnecessary tests and perform extraneous procedures to help
insulate themselves from malpractice lawsuits. In tandem, the cost of medical
malpractice insurance is outrageously high. For instance, a cardiothoracic
surgeon earning $2 million a year pays around $500 thousand per year for
malpractice insurance, or 1/4th of the earnings, yielding
malpractice premiums another source of increasing medical costs.
The Aging Population
The system of healthcare in the US
has in a sense become a victim of its own success, for the simple reason that
people are living longer. In 1900, individuals 65 years of age and older
comprised 4.1% of the population (17). This figure grew to 8.1% in 1950 and
12.8% in 2000 (17). By the year 2050, this figure is projected to approach
20.4% (17)4. The aging population contributes immensely
to the expansion in health related spending. As the US population has continued
to age over the past few decades and will continue to age, the elderly consume
the majority of health services to help stay alive. In order to exemplify the
unintended consequence of extending life expectancy on health costs consider a
patient having suffered from heart failure using ACE inhibitors and
beta-blockers to improve survival. During this patient’s extended years of
life, the patient will necessitate more care not only for heart disease but for
other diseases that will develop with age that cost more money. Also, as a
larger aging population requires more services, demand and costs escalate up.
In
being the nation’s major health service consumers, senior citizens are
projected to spend up to $105 billion in 2004 on health care (14). Additionally, people with chronic diseases
are living longer. There are currently 77 million baby boomers in their middle
ages. In comparison to individuals between the ages of 18 to 44, people aged 45
to 64 more likely to have a disability by threefold, six times more likely to
have high blood pressure, and 15 times more likely to die of cancer. In
summation, an aging population increases the quantity of services necessary as
they consume more days in hospitals, more outpatient services, more
prescriptions, and more advanced medical technology which are all factors that
contribute to skyrocketing medical service costs.
Mandates and Litigation
From the perspective of policy analysts,
state mandates or regulations contribute to the rising costs of medical
services. Many states, such as Washington which has at least 47 mandates
governing health care, require insurers to cover more and more specialized
health problems such as mental, drug abuse, and chiropractic problems that
further increase insurance premiums, adding to the pool of individuals
uncovered by insurance because they can not afford it. A study that was
conducted by the global management consulting and information technology
service PriceWaterhouseCoopers found that
government mandates and regulations are major drivers of rising health care
premiums. They accounted for 15% of the overall increase in 2001 (18).
According to the report each mandate adds its own cost, so collectively all
mandates contribute significantly to overall healthcare cost. Examples of
government regulation at both the state and federal levels that increase the
costs of healthcare include: 1) Mandates that cover specific benefits such as minimum
hospital stays for births; 2) Regulations to change the operations of
healthcare plans - for example, requiring appeals procedures when benefits are
denied or reducing the ability of insurers to reject applicants with
preexisting conditions; and 3) taxes on health insurance premiums. States often
regulate the charges for insurance premiums for health policies by requiring that
premiums charged to small firms fall in between specified limits. This type of
regulation frequently is conceptualized to keep premiums affordable for employees
in those firms. High-risk groups of individuals have lower insurance costs
because of the upper premium limit. Yet the lower premium limit is generally
higher than insurers would charge to those at low-risk because people who are
healthier are less likely to use health services. As a consequence, the
low-risk group tends to drop their coverage, which raises the average cost of
insurance for those who remain in the high-risk market.
Adding to this rising cost of health care in
addition to excessive government mandates are trial lawyer lawsuits. The purpose of the legal system of the
United States is to protect the rights of citizens to file legitimate lawsuits
in instances when they feel they have been harmed. However frivolous lawsuits
and excessive jury awards have frequently been allowed to overwhelm the legal
system, and all citizens pay the price. Lawsuit abuse as a result makes living
and healthcare more costly and less competitive. To highlight the effect of
such suits, a recent report by the American Tort Reform Association showed that
in Ohio in 2002 medical malpractice lawsuits alone cost every man, woman and
child $636 (19). This amounts to $2,544 for a family of four and totals $7.2
billion statewide.
Conclusion: Containing Health Care
Costs
The provision of services to its citizens is
the main function of a health system. A key component to effective
communication between health providers and citizens is financing of health
services. Health financing holds the purpose of making funds available to give
incentive to health providers in order so that all individuals have access to
personal and public health care services. As has been evidenced in this
chapter, the reason as to why health care costs have risen so drastically is
complex and multifaceted, and driven by technical, institutional, and political
powers. So the next logical question to ask is what may be done to curb the
high cost of health care services? Direct, out-of-pocket payment for health
services restricts large pools of the population from ever receiving health
care. In terms of mandates the Congressional Budget Office (CBO) analyzes the private-sector
costs that are likely to result of proposed federal mandates on health insurers
and health plans. These are a part of its duties under the Unfunded Mandates
Reform Act of 1995 (UMRA). The act requires the CBO to estimate the amount that
entities in the private healthcare delivery sector would have to spend to
comply with the mandates. In recent years, work by the CBO has analyzed
proposals for parity in the provision of mental health services, the assurance
of insurance coverage, and the expansion of the rights of patients. Some argue
that one main way to reduce individual health care costs is a focus on
prevention. Approximately 8 out of 10 medical conditions may be treated at home
and never need medical system intervention. Yet, the cost, supply
and service issues that face the healthcare industry in the next few years
require more than merely incremental fixes. Both payers and providers pf health
services must implement long-term strategies that combat the sources of health
care cost rise, such as those mentioned in this chapter. The wait to implement
the necessary actions could push healthcare systems to crumble under the
pressures being imposed.
Notes:
1.
The
methodology for the assessment of health system performance is controversial
and as a result is being reviewed prior to reassessment. More information on
the exact calculation of this rank can be found in the 2000 World Health Report
at http://www.who.int/health-systems-performance/whr2000.htm.
2. Inflation occurs when there is an increase
in the amount of circulating currency that goes beyond the needs of trade. With
inflation an oversupply of currency is created, and according to the law of
supply and demand, the value of money decreases, driving the cost of goods and
services up (deflation results from the opposite condition). More information
on US inflation may be found at http://inflationdata.com/inflation/.
3.
This
data is derived from an interesting figure that plots the percent change in
spending versus the annual change in private health spending per capita between
1961 and 2001 that can be accessed at http://www.allhealth.org/sourcebook2002/ch8_9.html.
4.
For
visual and additional statistical data on the US demographic trend of aging population
growth at http://www.aoa.gov/NAIC/Notes/trendsproject.html
put out by the US Administration on Aging may be visited.
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13. National Institute for Health Care
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Another Year of Escalating Costs. March 29, 2002. http://www.nihcm.org/.
14. Connolly, Ceci. “A Few Heavily Advertised
and High-Priced ‘Blockbuster’ Medication Drive 17 Percent Increase”. Washington
Post. March 29, 2002. http://www.washingtonpost.com/wp-dyn/articles/A33611-2002Mar28.html.
15. Health
Affairs, September 2001
16. InflationData.com. http://inflationdata.com/inflation/.
4/12/03.
17.
US
Administration on Aging. Demographic Trends and Projections. http://www.aoa.gov/NAIC/Notes/trendsproject.html.
18.
PriceWaterhouseCoopers. http://www.pwcglobal.com/
19. Informed
Citizens of Ohio. http://www.informedcitizensofohio.com/issues.asp