Rising Cost of Healthcare in US Driven By Rising Prices in Absence of Rising Demand

Rising Cost of Healthcare in US Driven By Rising Prices in Absence of Rising Demand


It’s no secret that health care costs in
the United States are exceedingly high, and rising. The US spends the most of any country in the
world on healthcare in terms of percent of GDP, sitting around 18% as of the most recent
data. But to address the issue, we need to understand
what is driving this increase, and a new study appearing in the Journal of the American Medical
Association does the best job yet in decomposing the factors behind the rising costs. The researchers used data from the US Disease
Expenditure Project, which utilizes 183 data sources and 2.9 billion patient records to
quantify where each healthcare dollar is being spent in this country. Here’s the top level overview. After accounting for inflation, health care
expenditures increased by $933.5 billion between 1996 and 2013. To put that into perspective, that’s enough
money to create 9 additional interstate highway systems. We could fully fund 3 NASAs every year. Or we could provide 400 malaria nets to every
man, woman, and child in Africa. We could even do something crazy like pay
down the debt. But to save money in the future, we have to
know why we keep spending more. Here’s the breakdown. Some of the increase in spending comes from
the aging of the US population and population growth. Not much we can do about that. But 50% of the increase was simply due to
higher prices. This is distinct from healthcare utilization. In fact, healthcare utilization was decreased
a bit over this time period. This is shown most dramatically in the data
for inpatient care. Take a look at this bar chart. Use of inpatient care (that’s service utilization
– in purple) went down substantially from 1996 – 2013 as we moved to more outpatient
treatment. But this may have been a Faustian bargain. The price of the inpatient care that remained
went up much more – increasing overall inpatient spending by around 250 billion dollars. Let’s take a moment to realize how weird this
is, economically. Demand for healthcare decreased over time. Prices increased. That is not an efficient market. Different chronic diseases had different patterns
of price increases. The biggest increase was seen in diabetes
care, as you can see here, driven largely by rising costs of pharmaceuticals. Regardless of the disease, though, it is clear
that it is the price of what we’re buying – whether a drug, an ED visit, or a hospital
stay – not the amount of what we’re buying that is the major driver of cost increases. Efforts to reduce the consumption of healthcare,
therefore, may not bend the cost curve as much as efforts to reduce its price. That’s just my 2 cents.

One thought on “Rising Cost of Healthcare in US Driven By Rising Prices in Absence of Rising Demand

  1. This leaves one with a fairly obvious unanswered question. Why are price set so radically high? You do a good job of explaining what everyone already knows, in a well articulated yet simplified manner. However you are really saying anything outside of what is stated in the description? Was the point of the video to explain that you have "two cents", or why you have "two cents to share"…?

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