Why Health Care Costs Are Rising

Nationwide, health care costs for U.S. employers are expected to increase another 8% this year, which outpaces both inflation and salary increases. Meanwhile, the amount the U.S. spends each year on health care—now more than any other country at $2.2 trillion—is predicted by some sources to nearly double between 2006 and 2015.

Why Costs Are Rising

These are the primary factors that are fueling the increase in health care costs:

  • Rising incidence of chronic conditions. The number of people with chronic conditions such as diabetes, heart disease and high blood pressure continues to grow.
  • Lifestyle choices. Some 60% of Americans are overweight, and 7 out of 10 do not exercise regularly. Poor diet and inactivity increase the incidence of conditions such as diabetes, heart disease and colon cancer. Treating these conditions now accounts for 80% of total health care costs.
  • An aging population that needs more health care. The first wave of the baby-boomer generation has turned 50, and about 80 million more Americans will turn 50 over the next 10 years. The financial impact of this older population will be enormous—about 75% of the health care expenses spent in a person’s lifetime occur after age 50.
  • Liability concerns. Malpractice insurance costs for doctors and hospitals have soared, not because there are more cases, but because the awards to patients who win malpractice suits can be huge. The cost for this more expensive insurance is then passed on to health plans and those who sponsor and use them.
  • Lack of consumer education. Most Americans have not been taught nor encouraged to comparison shop for health care. Meanwhile, the true cost of health care services is often hidden from consumers, who pay just a small portion of the total cost through copayments and other forms of cost-sharing. This means that most consumers may never know how much a service costs or how to save money—making it difficult for them to put pressure on health care providers to deliver better results at lower prices. These factors create an environment in which consumers are in the dark about the costs they incur and how they can help control them.
  • Prescription drug behaviors. Encouraged by aggressive and expensive advertising campaigns, many patients now request costly brand-name medications when, in many cases, less expensive generic or over-the-counter medications would produce the same results.
  • Costs for uninsured Americans. When doctors and hospitals provide care to people who can’t pay because they don’t have insurance, this cost is shifted to those who do pay, including Nortel and other health plan sponsors, as well as to you and other health plan participants.
  • New technology. Keeping up with the latest and greatest advances in medical technology is extremely expensive. Doctors and patients want the latest and greatest, and the cost for this demand is being paid by health plan participants and sponsors.
  • Efforts by hospitals to improve their profitability. Many health plans do not pay hospitals, doctors and other health care providers the “full price” for their services. Prices are negotiated, and, in some cases, health care providers have had to accept prices that did not allow them to be profitable. Recent mergers of hospitals have increased their bargaining power, and health plans are no longer able to get the same deals as in the past.
  • Uneven quality of care and little relationship between cost and quality. Studies by many organizations show that some health care providers are much more effective than others at treating and preventing problems. Yet “average” quality health care may cost more than care that produces better results. When patients choose an expensive course of treatment that yields only average results, health plans pay more.