Why Do Healthcare Costs Keep Rising?

It’s no surprise that Americans spend a huge amount of money on healthcare each year. High insurance premiums, high deductibles, co-pays, and other out-of-pocket expenses are just some of the costs associated with health and wellness in the country.

One reason for rising healthcare costs is government policy. Since the inception of Medicare and Medicaid—programs that help people without health insurance—providers have been able to increase prices.

Still, there’s more to rising healthcare costs than government policy. Read on to find out how much the United States spends on health costs, which factors shape prices in this industry, how the COVID-19 pandemic changed the entire cost structure conversation, and how recent legislation offers both hope and help.

Key Takeaways

  • Healthcare costs in the United States have been rising for decades and are expected to keep increasing.
  • The United States spent more than $3.8 trillion on healthcare in 2019 and exceeded $4.1 trillion in 2020, according to a study by the Peterson and Kaiser organizations.
  • A Journal of the American Medical Association (JAMA) study found five factors that affect the cost of healthcare: a growing population, aging seniors, disease prevalence or incidence, medical service utilization, and service price and intensity.
  • In the long term, the financial impact of COVID-19-related healthcare spending is not expected to significantly affect healthcare spending in general.
  • The No Surprises Act—and other legislation included in the Consolidated Appropriations Act, 2021—offer some help when it comes to unexpected healthcare billing and costs.

Overall Costs of Healthcare

Healthcare costs have risen dramatically in the United States over the past several decades. According to a study by the Peterson Center on Healthcare and the Kaiser Family Foundation (KFF), U.S. healthcare spending rose nearly a trillion dollars from 2009 to 2019, when adjusted for inflation.

The study reported that U.S. healthcare spending during 2019 was nearly $3.8 trillion, or $11,582 per person. By 2028, these costs are expected to climb to $6.2 trillion—roughly $18,000 per person.

Where does that money go? According to the U.S. Centers for Medicare and Medicaid Services (CMS), 2019 healthcare spending can be broken down into 10 categories:

  • Hospital care (31%)
  • Physician services (20%)
  • Prescription drugs (10%)
  • Other personal healthcare costs (5%)
  • Nursing care facilities (5%)
  • Dental services (4%)
  • Home healthcare (3%)
  • Other professional services (3%)
  • Other non-durable medical products (2%)
  • Durable medical equipment (2%)

Why Are Healthcare Costs Rising?

A Journal of the American Medical Association (JAMA) study investigated how five key factors were associated with healthcare increases from 1996 to 2013:

  • Service price and intensity
  • Population growth
  • Population aging
  • Disease prevalence or incidence
  • Medical service utilization

The authors found that service price and intensity, including the rising cost of pharmaceutical drugs, made up more than 50% of the increase. Other factors, which comprised the rest of the cost increase, varied by type of care and health condition.

A more recent study by the Peter G. Peterson Foundation pinned the blame for rising prices on the same top three drivers identified by the American Medical Association (AMA): population growth, population aging, and rising prices.

Protection Against Rising Healthcare Costs

The No Surprises Act and other legislation contained in the Consolidated Appropriations Act (CAA), 2021, are designed to protect consumers from billing surprises and a lack of transparency. This legislation took effect on Jan. 1, 2022.

Services, Growing, and Aging Population

Healthcare gets more expensive when the population expands—as people get older and live longer. Therefore, it’s not surprising that 50% of the increase in healthcare spending comes from increased costs for services, especially inpatient hospital care. Nor is it a shock that the two next highest factors increasing such spending are population growth (23%) and population aging (12%).

Increase in Chronic Illnesses

The authors of the JAMA study point to diabetes as the medical condition responsible for the greatest increase in spending over the study period. The increased cost of diabetes medications alone was responsible for $44.4 billion of the $64.4 billion increase in costs to treat that disease.

After diabetes, conditions with the greatest increase in costs were:

  • Lower back and neck pain: $57.2 billion
  • High blood pressure: $46.6 billion
  • High cholesterol: $41.9 billion
  • Depression: $30.8 billion
  • Urinary disease: $30.2 billion
  • Osteoarthritis: $29.9 billion
  • Bloodstream infection: $26 billion
  • Falls: $26 billion
  • Oral disease: $25.3 billion

Increased Ambulatory Costs

Ambulatory care, including outpatient hospital services and emergency room care, increased the most of all treatment categories studied. Outpatient costs rose from an annual cost of $381.5 billion to $706.4 billion. Emergency room costs across all health conditions rose 6.4% over the same time period.

Rising Health Insurance Premiums

For those with employer-provided healthcare, average annual premiums for family coverage rose 37% from $15,545 in 2015 to $21,342 in 2020. Meanwhile, average unsubsidized family premiums for the Affordable Care Act (ACA) from 2015 through 2020 rose 97% from $8,724 to $17,244.

Rising Costs of Medicare and Medicaid

Government programs like Medicare and Medicaid have increased overall demand for medical services—resulting in higher prices as well. What’s more, increases in the incidence of chronic conditions such as diabetes and heart disease, especially among seniors, have had a direct impact on increases in the cost of medical care. Chronic diseases constitute 85% of healthcare costs, and more than half of all Americans have a chronic illness.

Demand for medical services has increased because of Medicare and Medicaid, resulting in higher prices.

Higher Out-of-Pocket Costs

Higher insurance premiums are only part of the picture. Americans are paying more out of pocket than ever before. A shift to high-deductible health plans (HDHPs) that impose out-of-pocket costs of up to $14,000 per family has added greatly to the cost of healthcare.

Employer contributions to HDHPs help to mitigate the higher deductible; in fact, according to one 2018 study, HDHP enrollees paid 20% of their total premium while preferred provider organization (PPO) enrollees paid up to 27% of theirs.

Patients Avoiding Care Due to Costs and COVID-19

People avoiding needed medical care due to concerns about costs has been a problem for several years. A 2019 survey by the Physicians Advocacy Institute (PAI) found patients avoiding care due to an inability to afford covering deductibles under their HDHPs.

A KFF poll now suggests that up to 50% of the public have either avoided or postponed medical care due to concerns about the COVID-19 pandemic, further exacerbating an already-serious problem. Avoiding care results in higher overall healthcare costs, as the delay makes treatable conditions more costly to treat.

Cost of COVID-19 Testing, Treatment, and Care

COVID-19, with the increased need for testing, treatment, and care, was expected to change the cost of healthcare. Some experts expected costs to rise, while others expected them to fall. Early on, healthcare spending did fall, mostly due to fewer patients seeking care, as discussed above. More recently, utilization and spending have both rebounded.

In the grand scheme of things, COVID may not alter the trajectory of healthcare spending a great deal. Though short-term spending fell, it is expected to grow at an average annual rate of 5.4% and reach $6.2 trillion by 2028.

Inefficiency and Lack of Transparency

Thanks to a lack of transparency and underlying inefficiency, it’s difficult to know the actual cost of healthcare. Most people know the cost of care is going up, but with few details and complicated medical bills, it’s not easy to know what you’re getting for the price.

Fortunately, lack of transparency in healthcare was addressed in the Consolidated Appropriations Act (CAA) of 2021. One section of this act increases transparency by removing gag clauses on price and quality information. Another requires disclosure of direct and indirect compensation for brokers and consultants to employer-sponsored health plans as well as to enrollees in plans on the individual market. This legislation, to become effective Jan. 1, 2022, is also designed to strengthen parity in mental health and substance-use disorder benefits and in reporting on pharmacy benefits and drug costs.

The No Surprises Act

Additional CAA legislation, known as the No Surprises Act, also slated to go into effect Jan. 1, 2022, guards against surprise billing—another leading cause of rising healthcare costs.

In addition to outlawing surprise medical and hospital bills, the act ends surprise air ambulance bills, requires transparency regarding in-network and out-of-network deductibles and out-of-pocket limitations, implements protections against provider discrimination, and requires health plan external review in the case of certain surprise bills.

Dispute resolution, patient protection, and transparency are mandated, as well as a requirement that providers issue fair and honest advance cost estimates. Other requirements include ensuring continuity of care, maintaining a price comparison tool, and several other provisions.

The American Rescue Plan

Additional healthcare cost containment provisions are part of the Biden administration’s American Rescue Plan (ARP) signed into law by President Biden in March 2021.

Among the provisions related to healthcare costs:

  • Increasing coverage under the ACA to include more generous financial assistance for ACA premiums to allow more families to qualify. This provision lasts through the end of 2022.
  • $46 billion to expand federal, state, and local testing for COVID-19 and contact tracing capacity.
  • A 100% subsidy of Consolidated Omnibus Budget Reconciliation Act (COBRA) health insurance premiums to ensure that laid-off workers and their families are covered through the end of September 2021.

How Much Do Healthcare Costs Rise Each Year?

According to the American Medical Association (AMA), healthcare costs are rising by about 4.5% a year. Spending on healthcare in the United States increased by 4.6% in 2019—to $3.8 trillion across the country, or $11,582 per person. This growth rate is in line with 2018 (4.7%) and slightly faster than what was observed in 2017 (4.3%).

What Is the Cost of the Average Health Insurance Premium?

The average cost of health insurance in 2020 was $456 for an individual and $1,152 for a family per month. However, this figure can vary widely depending on where you live and your healthcare needs. And no matter which type of health insurance you buy, it’s likely that you’ll see yearly cost increases.

Why Did Health Insurance Premiums Go Up in 2021?

In addition to the long-term trend for increasing healthcare costs, short-term factors can also make a big difference. Many people will see the cost of their health insurance increase faster than the average in 2021. This is primarily due to the cost of COVID-19 testing and treatments.

The Bottom Line

Americans spend a huge amount on healthcare every year, and the cost keeps rising. In part, this increase is due to government policy and the inception of national programs like Medicare and Medicaid. There are also short-term factors, such as the 2020 financial crisis, that push up the cost of health insurance. The average increase in individual health insurance has been about 4.5% per year for the past five years.

However, new legislation has put in place new protections for consumers. The CAA, mentioned above, increases price transparency for health insurance by removing gag clauses on price and quality information. The No Surprises Act, slated to take effect Jan. 1, 2022, guards against surprise billing.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Peterson-KFF Health System Tracker. “How Has U.S. Spending on Healthcare Changed Over Time?

  2. Peter G. Peterson Foundation. “Why Are Americans Paying More for Healthcare?

  3. U.S. Centers for Medicare and Medicaid Services. “National Health Expenditures 2019 Highlights.”

  4. JAMA: Journal of the American Medical Association. “Factors Associated with Increases in US Health Care Spending, 1996–2013.”

  5. U.S. Congress. “Consolidated Appropriations Act (CAA), 2021,” Page 1,576.

  6. eHealth. “How Much Does Health Insurance Cost without a Subsidy?

  7. eHealth. “Health Insurance Price Index Report for the 2015 Open Enrollment Period,” Page 3.

  8. Kaiser Family Foundation. “Average Annual Worker and Employer Premium Contributions for Family Coverage, 2010, 2015, and 2020 9540.”

  9. National Center for Biotechnology Information. “The Relation of the Chronic Disease Epidemic to the Health Care Crisis.”

  10. Internal Revenue Service. “Rev. Proc. 2020-32.”

  11. Society for Human Resource Management. “High-Deductible Plans More Common, but So Are Choices.”

  12. Physicians Advocacy Institute. “PAI-NORC Survey Shows High Deductible Health Plans Are a Barrier to Needed Care.”

  13. Kaiser Family Foundation, Kaiser Health News. “Nearly Half of Americans Delayed Medical Care Due to Pandemic.”

  14. Peterson-KFF Health System Tracker. “How Have Health Spending and Utilization Changed During the Coronavirus Pandemic?

  15. U.S. Centers for Medicare and Medicaid Services. “National Health Expenditure Data: NHE Fact Sheet.”

  16. Journal of Accountancy. “How COVID-19 Could Affect Health Spending.”

  17. U.S. Congress. “Consolidated Appropriations Act (CAA), 2021,” Page 1,709.

  18. U.S. Congress. “H.R.1319 — American Rescue Plan Act of 2021.”

  19. American Medical Association. “Trends in Health Care Spending.”

  20. eHealth. “How Much Does Individual Health Insurance Cost?

  21. Insurance Journal. “Healthcare Costs, Premiums Likely to Rise for Years Due to COVID-19.”