Why Healthcare Costs So Much

Part 1: Introduction

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Healthcare Costs

Healthcare is perhaps the most visible domestic policy concern for Americans here in 2017. Whether it’s the president and Congress arguing over the fate of Obamacare, or the constant stream of TV commercials for old-people drugs, our daily experience includes an endless concern over medical care.

Part of this has to do with the increasing costs associated with health insurance and provider care. Not that most people pay the full costs themselves. In 2015, for example, 84% of Americans had at least part, and often most, of their healthcare premiums covered by an employer or government program. But those premium payments don’t manifest out of thin air. The money to pay them has to come from somewhere, leading to lower base incomes for employees with health policies, or higher taxes that cover government-sponsored or reimbursed plans.

Beyond the subsidization of insurance premiums, there are also significant out-of-pocket costs. Thanks to inflation, prices for most things are constantly on the rise, but healthcare regularly outpaces the basic inflation rate (see table 1).

Table 1. Healthcare Increases by Year
Year Inflation Rate Healthcare Increase
2006 2.5% 6.5%
2007 4.1% 6.5%
2008 0.1% 4.5%
2009 2.7% 4.0%
2010 1.5% 4.1%
2011 3.0% 3.5%
2012 1.7% 4.0%
2013 1.5% 2.9%
2014 0.8% 5.3%
2015 0.7% 5.8%
Source for Healthcare Increases: “National Health Expenditures Summary Including Share of GDP, CY 1960-2015,” Centers for Medicare and Medicaid Services. Source for Inflation: BLS Inflation Rate.

These higher healthcare costs do not even take into account increased premiums paid by individuals or families who must fund their own policies, or the higher deductibles that nearly everyone is seeing. Healthcare costs seem to be skyrocketing, well beyond other sectors of the economy. The question, of course, is why.

The general perception is that greedy insurance companies, drug companies, and doctors are driving the increases. One can always find examples of corporations behaving badly with profits or regulations, but anecdotes are not the same as institutional trends. If medical insurance is such a lucrative business with record profits just a greedy boardroom decision away, why are so many insurers exiting local markets? There is also the question of why those working in medical industries would be any more inclined to greediness then, say, those who run grocery stores.

A friend recently told me that healthcare is too important to leave in the hands of ordinary businesses. If we look at the industry as a place where the ill and infirm are drained of their life savings for pure ego and profit, then it’s understandable that someone would balk at for-profit companies doling out healthcare for money. And yet, most of us have a heartfelt respect for doctors, and we depend on hospitals to support us in a crisis. How can we praise providers one minute, and condemn them as thieves and charlatans the next? What is the big deal with the medical profession, and why are we pumping all our money into it?

We’ll look at these questions and more in upcoming articles. And we’ll try to do it all without resorting to hysteria and anger, feelings that, like healthcare costs, appear to be on the rise across the nation. If you’ve been confused by the battle over the cost of healthcare, or even a little angered, then let’s take some time together to thoughtfully find out why this industry is consuming all of our thoughts and bank accounts.

(Click here to continue with Part 2 in the series.)

[Image Credits: pixabay/Unsplash]

3 COMMENTS

  1. If more Americans took personal responsibility for their own health, by adopting lifestyles which emphasized healthful diet and exercise, we, as a country, could reduce our morbidity rate by at least 40 to 50 percent, by preventing the many incidences of disease that are truly preventable. This, in turn, would reduce demand for services for expensive-to-treat diabetes and heart disease, and would enable us, as a country, to focus our health care resources on treating those who fall ill through no fault of their own.

  2. You’re absolutely right. No politician would get elected telling us those truths we don’t want to hear: that most of us eat or drink too much, exercise too little, and have other unhealthy habits. From Kennedy’s US Physical Fitness Program, to Michelle Obama’s “Let’s Move!” program, the number of people who actually changed their habits is very small.

    Another aspect is that there is a growth in our expectations for what we to be covered. Many medical treatments that we didn’t have then, we have now and want to be covered under insurance– or at least are still counted in these healthcare costs.

    A factor completely ignored in most of these discussions is that hospitals and doctor’s offices were not sources of corporate income until the “The Health Maintenance Organization Act of 1973” made it legal to profit from healthcare.

    After 44 years as a for-profit enterprise it is still a changing industry. We went from hospitals run by charities and churches and named after saints, to hospitals named by marketing gurus and owned by ever more integrated healthcare companies. Costs have been rising above inflation the entire time.

    • Naturally, it was always legal to profit from healthcare. Doctors, like butchers and grocers, have always had the ability to charge fees for their services. The 1973 HMO law simply added a new legal organization that defined certain rules and regulations for those doctors willing to contract under an HMO umbrella.

      While I have no evidence of this, I suspect that the federal government actually prefers large corporations over small businesses. That is, the government prefers having all doctors under a few HMOs instead of having them all in private practice. Once a business reaches a certain size, it becomes more bureaucratic, and therefore, more accepting of regulations that can be managed through the bureaucracy. Small businesses have too much variety to be regulated effectively, and we all know that the federal government loves regulations.

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