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7 Reasons for Rising Health Care Costs

Written by: Christina Merhar
May 9, 2014 at 7:00 AM

The U.S. currently spends more on health care services than any other country, exceeding $2.6 trillion in 2012, or 18% of gross domestic product. Most years, medical spending rises faster than inflation and the economy as a whole. While the growth rate of health care costs has leveled off the past few years, the U.S. Commerce Department’s Bureau of Economic Analysis announced that health care spending rose 9.9% in the first quarter of 2014 — the largest quarterly increase in more than 30 years. cost_of_health_care

We write a lot about the increasing costs of employer-sponsored health insurance, and why the system is broken for employers and employees. But why has health care become so expensive?

Here are seven reasons for rising health care costs. This list is adapted from an article by Kaiser Health News.

Seven Reasons for Rising Health Care Costs

1. We reward medical providers for doing more, rather than being efficient

Most insurers -- including Medicare -- pay doctors, hospitals, and other medical providers under a fee-for-service system that reimburses for each test, procedure, or visit. On top of this, our medical system is not integrated which leads to repetitive tests and over-treatment.

2. We're older, sicker, and fatter

Nearly half the U.S. population has one or more chronic conditions such as asthma, heart disease or diabetes, which drive up costs. Two-thirds of adults are either overweight or obese, which also leads to chronic illness and inflated medical spending.

3. New drugs, technologies, and procedures are expensive

Medical advances can improve our health and extend our life, but they also add to the cost of health care. Patients and doctors often demand the newest (more expensive) treatments, even if there is little or no evidence that they are better. 

4. Employer-sponsored health benefits are tax-free, so most consumers don't pay directly for their health care

The majority of people with insurance get it through their job and are disconnected from making true consumer decisions about the cost of their care or their coverage (read why employers offer health insurance in the first place).

5. We (consumers) don't have enough information to make fully informed decisions about medical care, and it's cost

Despite a wealth of information at our finger tips via medical journals and the Internet, there is no uniform or quick way to understand treatment options and the costs associated with them. We would never buy a car without comparing models, features, gas mileage, cost, and payment options. But this is how we buy health care. And according to KHN, Americans vary widely in how they view end-of- life issues, with some desiring every possible medical intervention to stave off death in every situation, no matter how small the possibility of success.

6. Hospitals and other providers are increasingly gaining market share and are better able to demand higher prices

According to KHN, while mergers or partnerships among medical providers or insurers may improve efficiency and help drive down prices, consolidation can also have the opposite effect, allowing near-monopolies in some markets and driving up prices. Increasingly, hospitals are buying up rivals and directly employing physicians, creating larger medical systems.

7. Fear of malpractice lawsuits drives spending

Malpractice premiums and jury awards are part of what drives spending. However, it is also doctors prescribing unnecessary tests or treatment out of fear of facing a lawsuit.

What other factors are driving up health care costs? Leave a comment below.

Sources: KHN and Bipartisan Policy Center

Topics: Health Benefits, Healthcare Costs