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Rising health care costs are a major concern for policymakers, employers, health care leaders, and insured and uninsured Americans alike. Health insurance premiums are growing by 10-15 percent a year, as insurance companies increase profits and reserves to recoup losses incurred in the mid-1990s. (12) Health care spending per capita increased by nearly 9 percent in 2001 and, although projected to slow somewhat, will probably continue to grow by 7 percent annually for the next decade. Prescription drugs remain the fastest growing item, but acceleration in hospital costs is also a troubling development. Utilization of health care services, after being relatively flat in the mid-1990s, is rising, reflecting more use of hospital outpatient services, more prescription drugs, more physician visits, and more emergency room use. Rather than attack the underlying causes of the increases, our "pass the buck" system of health insurance responds automatically during a period of rising costs by shifting costs onto another party: from one employer to the next, from employers to workers, from federal government to state governments and back, and from insurers generally to safety net hospitals serving the uninsured. Most employers provide health insurance to their workers — but 25 million workers are covered either by another employer or by public programs. (13) Employers who insure their workers have also been increasing deductibles and employee premiums. Far more energy is invested in shifting costs than in enhancing efficiency or quality of health care. Fragmentation contributes to higher costs, as changes in families' economic and personal circumstances cause constant churning in insurance coverage. Sixty-two million people — one of four Americans — were uninsured at some point during 2000, and 85 million were uninsured at some point during the four-year period 1996-1999. (14) In 2002, the administrative costs of private and government insurance totaled $111 billion, a major portion of which was incurred as people enrolled, disenrolled, re-enrolled, and changed insurance coverage and plans. Insurance companies also engage in cost-shifting. They respond to rising costs by becoming more selective about whom they cover and seeking to attract favorable risks, not primarily by innovating to improve quality and efficiency. A Fund-supported study (15) found that, over the five years from 1999 to 2003, increases in cost-sharing by private plans participating in Medicare had the cumulative effect of increasing out-of-pocket costs for seniors in poorer health by an estimated 140 percent. Selective use of increased deductibles and copayments may suggest an underlying strategy of discouraging enrollment and retention of sicker enrollees. The belief that private insurance is more "efficient" than public programs is deeply entrenched. Yet a recent Fund-supported study (16) comparing the growth in per enrollee payments for comparable services in Medicare and private insurance found that Medicare outperformed private insurance over the long term. Medicare uses its considerable purchasing clout to obtain favorable payment rates from providers, and its administrative costs are considerably lower than those of private insurers or managed care plans. Expanding the reach of insurance coverage and increasing its efficiency are essential to improving the performance of the American health care system and ensuring that the benefits of modern medicine are available to all. Patients can be encouraged to help, too, through incentives to receive preventive services, for example, or to opt for less-expensive, therapeutically equivalent medications. Insurance can be designed to reduce wasteful spending on administration and reward hospitals, physicians, and other providers for high-quality, cost-effective care.
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Average annual percentage growth in United States health expenditures |
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Levit et al., "Trends in U.S. Health Care Spending, 2001," Health Affairs 22 (January/February 2003); and Heffler et al., "Health Spending Projections for 2002–2012," Health Affairs Web Exclusive (February 7, 2003) |
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Estimated total annual out-of-pocket spending for Medicare+Choice enrollees |
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Gold and Achman, Average Out-of-Pocket Health Care Costs for Medicare+Choice Enrollees Increase 10 Percent in 2003, The Commonwealth Fund, August 2003 |
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