It may not come as a surprise that Americans spend a significant amount of money on their healthcare. High insurance premiums, high deductibles, copays, and other out-of-pocket expenses are just some of the costs associated with health and wellness in the country.

Healthcare costs have steadily risen for Americans because of government policy. Since the inception of Medicare and Medicaid, providers have been able to increase prices, as these programs help those who don't have health insurance. The rest of the country relies on healthcare that's sponsored by companies.

But there is more to healthcare costs than just government policy. Read on to find out more about just how much the U.S. spends on health costs and what dynamics shape prices in this industry.

Key Takeaways

  • Healthcare costs in the United States has been rising, and continues to do so.
  • The U.S. spent almost $3.5 trillion on healthcare in 2017, according to a study by the American Medical Association.
  • The 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, after increased costs for services.
  • The two highest factors are the increase in population and an aging population.

Overall Costs of Healthcare

Healthcare costs have risen in the United States, and continue to increase. According to a study published in the Journal of the American Medical Association (JAMA), healthcare spending in the United States rose nearly a trillion dollars from 1996 to 2015. The study reported that the overall cost of healthcare in the United States was $3.5 trillion or $10,739 per capita in 2017.

The JAMA study tried to establish how five key factors, including population growth, population aging, disease prevalence or incidence, medical service utilization, and service price and intensity, were associated with healthcare increases over time. 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. 

Growing and Aging Population

Healthcare becomes costlier when the population expands, and people get older and are living 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 when it comes to increased healthcare 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 were 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:

  • Low-back and neck pain: $57.2 billion
  • High blood pressure: $46.6 billion
  • High cholesterol: $41.9 billion
  • Depression: $30.8 billion
  • Falls: $26 billion
  • Urinary disease: $30.2 billion
  • Osteoarthritis: $29.9 billion
  • Bloodstream infection: $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 over the course of the JAMA study, while emergency department costs across all health conditions, rose 6.4% over the same time period.

Rising Health Insurance Premiums

For most people, the rising cost of health insurance premiums lies at the center of concerns about rising health care costs. According to the National Conference of State Legislatures (NCSL), the average annual premium for family healthcare coverage rose nearly 5% in 2018 to $19,616. The average increase in premium costs in 2018 for people on a private plan or a healthcare exchange was $201. The two most-cited reasons for these increases were government policy and lifestyle changes.

Government programs like Medicare and Medicaid have increased overall demand for medical services—resulting in higher prices. In addition, as noted above, increases in the incidence of chronic conditions like diabetes and heart disease have had a direct impact on increases in the cost of medical care since the two diseases alone are responsible for 85% of health care costs and almost 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 can impose out-of-pocket costs—including deductibles, copays and coinsurance—of up to $13,300 per family have added greatly to the cost of health insurance. In fact, between 2006 and 2016, out-of-pocket costs for Americans with employer-sponsored health coverage rose faster than the costs that their insurers paid.

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 hard to decipher invoices, it’s not easy to know what they are paying for. The Wall Street Journal reported about one hospital that discovered it was charging more than $50,000 for knee-replacement surgery that only cost between $7,300 and $10,550. If hospitals don’t know the true cost of a procedure, patients may have difficulty shopping around. When it comes to overall transparency, a New England Journal of Medicine (NEJM) survey showed that only about 17% of care professionals believed their institutions had either “mature” or “very mature" transparency.

Patients Avoiding Care

Rising costs have created another casualty: People who skip medical care altogether. They do so not because they are afraid of doctors, rather, because they're afraid of the bills that come with healthcare. A poll by the West Health Institute and NORC at the University of Chicago revealed that 44% of Americans refused to go to a doctor due to cost concerns. About 40% of those surveyed said they skipped a test or treatment for the same reason. In many cases, those who refuse treatment even have medical insurance. The result of delaying or avoiding treatment is obvious, eventually the care required will be even more expensive.

Bottom Line

Each of the factors mentioned here are responsible for some part of the reason healthcare costs are rising although none is solely responsible. Increasing costs for medical services, caused by both a growing and aging population play a large role, but so do other factors like the growing number of people with chronic disease, increased costs for outpatient and emergency room care, higher premiums and out-of-pocket costs. These factors are exacerbated by inefficiency and lack of transparency in the world of medicine.

Potential solutions include employer-sponsored wellness programs—especially those that target chronic illness—increased reliance on medical technology to remove inefficiencies, and attempts to achieve greater transparency to help lower costs. For individuals, the primary way to reduce cost is to maintain a healthy lifestyle and to have regular checkups to avoid the development of long-term health problems.