Are Soaring Health-Care Costs Hurting the U.S. Economy?

Are Soaring Health-Care Costs Hurting the U.S. Economy?

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By Dan Timotic CFA

About 8% of U.S. household spending went toward health care in 2015, up from 5.8% in 2007. Even though the growth of nationwide health-care spending has slowed, the cost burden is falling more heavily on consumers.1

More than 118 million people qualify for coverage through government programs such as Medicare, which serves individuals age 65 and older and the disabled, or Medicaid, which provides care for the poor. Still, more than 55% of the U.S. population rely on health insurance provided by an employer.2

The health-care landscape has changed over the last decade, but some economists believe uncontained costs still pose a threat to broader economic growth. Here’s a closer look at recent trends, and why it’s more important than ever to be an informed health-care consumer.

Public Spending

Growth in U.S. health-care spending has outpaced total economic growth over the past five decades. In 2014, health-care expenditures accounted for about 17.5% of GDP, up from 5.6% in 1965.3 Though major advances in medical technology have contributed to spending growth, they have also led to better health and well-being overall.4

Public-sector spending has grown more quickly than private spending, largely due to an aging population, rising Medicare enrollment, and the expansion of Medicaid. The share of total spending by Medicare and Medicaid increased from 6.8% in 1966 to 36.8% in 2014.5

ACA Under Way

The Affordable Care Act created state-based exchanges where self-employed individuals, part-time workers, and others without access to group coverage can buy private health insurance. Consumers can compare plans online, and families with incomes up to 400% of the federal poverty level may be eligible for tax credits that reduce premiums. As income rises, subsidies decrease. In 2016, about 85% of the 12.7 million individuals who purchased coverage from the Health Insurance Marketplace received a subsidy.6

Since 2014, all citizens and legal residents have been required to have “minimum essential” health coverage or pay a penalty. The health insurance mandate was intended to add healthy individuals to the insurance pool and counterbalance a provision that prohibits insurers from excluding people with pre-existing conditions. As a result, the uninsured rate has decreased from 13.3% in 2013 to 9.1% in 2015.7


Workplace Plans

Employers have been paying around 80% of individual health insurance premiums, but plan changes, including higher deductibles and coinsurance rates, have shifted costs to workers who use health-care services.8

For example, the average deductible for individual coverage in an employer-provided health plan was $1,318 in 2015, up from $917 in 2010. A deductible is the amount the patient must pay before the insurance payments kick in. Health insurance deductibles grew 67% between 2010 and 2015, almost three times as fast as premiums and about seven times as fast as wages and inflation.9

If health insurance premiums continue to rise, it is conceivable that employers could pass more of the costs on to workers by raising premiums and coinsurance or limiting wage increases.

Accounting for Costs

It’s estimated that total U.S. health- care spending increased 5.5% to reach $3.2 trillion in 2015, and growth is projected to average 5.8% annually through 2025. Cost increases have moderated after averaging nearly 8% annually over the previous two decades, but they are still increasing much more than overall inflation.10 Prescription drug prices have been rising at a faster pace. According to one drug-benefits manager, the average price of brand-name drugs rose 16.2% in 2015, surging 98.2% since 2011.11

The research and development of breakthrough medical technologies is undoubtedly a valuable endeavor. Even so, experts say newer and more expensive treatments are not always more effective than existing lower-cost options. It has also been suggested that the fee-for-service payment model — in which insurers reimburse providers based on the number and type of treatments — may drive inefficiency and unnecessary spending by rewarding the quantity rather than the quality of care.12

Economic Impact

Even with insurance coverage, an illness or injury can cause financial pain for a middle-class family with limited disposable income. The prospect of medical bills may cause some families to skip or postpone necessary care, and those who do seek treatment have less money available to spend on other basic needs. A Brookings Institution analysis found that middle-income household spending on health care increased nearly 25% between 2007 and 2014, while spending on restaurant meals and clothing dropped significantly (–13.4% and –18.8%, respectively).13

Health spending across the economy is expected to accelerate and reach 20% of GDP by 2025, which could put additional strain on consumers, employers, and the federal budget.14

Obama Care

Open Enrollment

This is the time of year when employers introduce changes to their benefit offerings, so choosing — and then using — your health plan carefully could help you save money. Before you sign up for a specific plan, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year’s usage, and check to see whether your doctors are in the insurer’s network.


1, 8, 11, 13) The Wall Street Journal, August 25, 2016 2, 7) U.S. Census Bureau, 2016 3, 5, 10, 14) Centers for Medicare and Medicaid Services, 2016 4, 12) The Brookings Institution, 2015 6) U.S. Department of Health and Human Services, 2016 9) Kaiser Family Foundation, 2015. 


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4 Responses

  1. 25% of Cardiologists Cite Cost as Important When Prescribing

    Stat News recently covered a survey by CMI/Compas on the top factors considered by physicians when prescribing treatments. Here are some key findings on cost considerations from the report:

    • 47% of primary care physicians cite cost as their most important factor.
    • 1 in 4 cardiologists pointed to cost as the most important factor.
    • Cost ranked as the fifth most pressing concern among dermatologists.
    • 33% of oncologists cited cost, making it only the sixth most important issue
    • Neurologists named cost as the eighth most pressing matter.
    • Pulmonologists ranked cost as the least important factor when prescribing.

    Source: Stat News, November 15, 2016


  2. PP-ACA UPDATE: Oh No!

    US health care tab hits $3.2T; fastest growth in 8 years.



  3. U.S. Drug Spending Increased 3.8% in 2016

    Express Scripts recently released their annual report on prescription drug spending. Here are some key findings from the report:

    • U.S. drug spending increased 3.8% in 2016, 27% less than in 2015.
    • Drug spending decreased for one third of plans in 2016.
    • The average out-of-pocket cost for a 30-day prescription was $11.34 in 2016.
    • Member OOP cost share was 14.6% of the total costs per adjusted Rx in 2016.
    • Average drug unit costs rose 2.5% in 2016, 22% less than in 2015.
    • Specialty drug costs rose 6.2% in 2016, down from the 11.0% increase in 2015.

    Source: Express Scripts, February 2017


  4. How will outcomes-based pricing arrangements impact prescription drug costs?

    Short answer first. It will spread, but not become wide-spread; but it will have little material impact on prescription drug costs. And now the too-long answer, ending with something positive.

    “Outcomes-based pricing arrangements,” a minor variant of “value-based pricing arrangements,” have been growing since 2009 when CIGNA and Merck & Co. agreed to rebate levels being tied to certain diabetes metrics. But growing is not the same as becoming widespread. Like many other payment methodologies, this will expand up to a point and then slow down, occupying a definite space in our legion of payment methodologies, but not as the dominant form.

    There are several reasons why this is so, including the following:

    • There are sooooooo many drugs out there that it’s just not practical to try and handle them all this way. Of course, you don’t need a lot of these agreements to affect a lot of the total drug spend, so this isn’t a primary reason.

    • Being outside of the automated (and inexpensive) payment processes of most PBMs, they can be costly to administer because of the need to run special reports, perform manual calculations, and then deal with the inevitable disagreements that then arise.

    • Most “outcomes”* metrics are clinical, though some agreements include utilization as well. The primary focus on clinical metrics is fine (and it would be sad indeed if a drug could not produce similar results to its clinical trials in the first place), but are not automatically linked to reducing or even managing costs; not that there’s anything wrong with that, just sayin…

    • Metrics around utilization are mostly, but not always, avoidance of costs in the future, which requires an act of faith, unless a payer is willing to swallow the old “regression to the mean” idea that still bedevils the disease management industry.

    • The admixture of rebates, discounts and tier-level placement is not so easy to explain to, and achieve buy-in from, self-funded employer groups. It also gets tossed in the existing murk of rebates, discounts, and side-deals that have come to dominate payment for the drug benefit (assuming any one party even knows what they all are)

    • State and federal governmental agencies with “most favored nation” requirements may make it difficult to apply any agreement that can potentially reduce a drug’s cost to less than what the agency is paying, even if they do not participate.

    But the Number One Reason with a Bullet, or more accurately without a bullet [point] is this: Even good rebates or an outcomes-based payment agreement cannot seriously blunt the impact of the regular and significant price increases that have been boosting overall spending for prescription drugs by both payers and consumers. To be sure, any rebate program is better than paying full price, but at best it’s a modest slowing of the rate of rise that does not materially have an impact of the total cost of drugs.

    Having thrown so much shade on this, I’ll end by saying that in my opinion, outcomes-based payment arrangements are not a bad thing. They do no harm, and they do align clinical, if not financial, goals of all the involved parties: payers, providers, patients, and manufacturers.

    * I put “outcomes” in quotation marks because so many are actually intermediate metrics that we all hope will improve outcomes, if we can even agree on what an outcome is for a particular condition. This isn’t a bad thing, just reality.

    Peter R. Kongstvedt MD FACP


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