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The Increasing Cost of Health Care - Why Did Health Care Costs And Spending Increase?

The increase in the cost of medical care is challenging to analyze because the methods and quality of health care change constantly and as a result are often not comparable. A hospital stay in 1960 did not include the same services offered in 2004. Further, the care received in a physician's office today is in no way comparable to that received a generation ago. One contributing factor to the

— Data not available.
… Category not applicable.
1Dec. 1986 = 100.
2Dec. 1996 = 100.
Note: 1982–84 = 100, except where noted.
SOURCE: "Table 113. Consumer Price Index and Average Annual Percent Change for All Items, Selected Items, and Medical Care Components: United States, Selected Years 1960–2002," in Health, United States, 2003, National Center for Health Statistics, 2003, http://www.cdc.gov/nchs/data/hus/tables/2003/03hus113.pdf (accessed July 2, 2004)
Components of medical care
Medical care services … 5.2 8.8 8.1 6.6 3.3 4.3 4.8 5.1
Professional services … — 7.7 7.2 5.2 3.3 3.7 3.7 3.0
Physicians' services … 4.6 8.3 7.7 5.4 3.1 3.7 3.6 2.8
Dental services … 3.8 7.2 7.0 5.8 4.6 4.6 4.1 4.5
Eye glasses and eye care1 … — — — 3.2 1.5 2.9 3.2 0.6
Services by other medical professionals1 … — — — 3.7 2.5 2.0 3.3 2.7
Hospital and related services … — — 9.9 7.7 3.8 5.9 6.6 8.7
Hospital services2 … — — — — — 6.0 6.6 9.0
Inpatient hospital services2 … — — — — — 5.5 6.3 8.4
Outpatient hospital services1 … — — — 8.1 4.7 7.2 6.6 10.2
Hospital rooms … 9.8 11.2 9.9 7.4 — — — —
Other inpatient services1 … — — — 7.7 — — — —
Nursing homes and adult day care … — — — — — 4.8 4.1 5.0
Medical care commodities … −0.1 5.0 8.0 4.6 3.1 3.2 4.0 3.6
Prescription drugs and medical supplies … −1.3 4.3 9.6 5.3 3.9 4.4 5.4 5.2
Nonprescription drugs and medical supplies1 … — — — 3.1 1.4 0.7 0.7 −0.1
Internal and respiratory over-the-counter drugs … — 5.9 6.9 2.7 1.3 0.6 1.1 −0.1
Nonprescription medical equipment and supplies … — — 5.7 3.8 1.5 0.8 0.1 −0.4

rising cost of health care is the increase in biomedical technology, much of which is now available for use outside of a hospital.

Many other factors also contribute to the increase in health care costs. These include population growth, high salaries for physicians and some other health care workers, and the expense of malpractice insurance. Escalating malpractice insurance costs and professional liability premiums have prompted some physicians and other health care practitioners to refrain from performing high-risk procedures that increase their vulnerability or have caused them to relocate to states where malpractice premiums are lower. Furthermore, to protect themselves from malpractice suits, many health care practitioners routinely order diagnostic tests and prescribe treatments that are not medically necessary and do not serve to improve their patients' health. This practice is known as "defensive medicine," and while its precise contribution to rising health care costs is difficult to gauge, industry observers agree that it is a significant factor.

Although physicians have historically been the most vocal protesters of rising malpractice insurance premiums, hospitals and other health care providers also must purchase malpractice insurance to protect them from financial ruin in the event of lawsuits. An August 24, 2002, article in the New York Times reported that some

FIGURE 5.1

TABLE 5.3

National health expenditures, by source of funds, selected years 1990–2013
Third-party payments
Public
Year Total Out-of-pocket payments Total Private health insurance Other private funds Total Federal2 State and local2 Medicare3 Medicaid4
Historical estimates Amount in billions
1990 $696.00 $137.30 $558.70 $233.50 $42.80 $282.50 $192.70 $89.80 $110.20 $73.60
1998 1,150.30 175.3 975 382.9 70.8 521.3 368.4 152.9 210.2 171.5
1999 1,222.60 184.5 1,038.10 412.7 72.6 552.9 386.4 166.4 213.5 186.8
2000 1,309.40 192.6 1,116.90 449.3 72.9 594.6 416 178.6 225.1 203.4
2001 1,420.70 200.5 1,220.20 495.6 72.3 652.3 460.3 192 246.5 224.3
2002 1,553.00 212.5 1,340.50 549.6 77.5 713.4 504.7 208.7 267.1 250.4
Projected
2003 1,673.60 227 1,446.60 606.7 80.9 759 535.2 223.8 280.9 269.2
2004 1,793.60 243 1,550.60 656.5 84.5 809.6 569.1 240.5 295.2 292.7
2005 1,920.80 260.9 1,660.00 707 88.7 864.2 605 259.3 309.3 319.2
2006 2,064.00 279.7 1,784.30 762.2 93.8 928.2 648.1 280.1 328.3 348.4
2007 2,219.20 299.3 1,919.90 821.9 99.5 998.5 695.5 303 349.3 380.4
2008 2,387.70 319.9 2,067.80 887.7 105.3 1,074.80 747.1 327.7 372.9 414.9
2009 2,565.00 341.7 2,223.30 954.6 111.3 1,157.40 803.5 354 399.3 452.2
2010 2,751.00 364.3 2,386.70 1,022.20 117.6 1,246.90 864.9 382 428.9 492.1
2011 2,945.60 387.4 2,558.20 1,092.00 123.7 1,342.50 930.6 411.9 460.8 534.8
2012 3,145.80 411.3 2,734.50 1,160.60 129.9 1,444.00 1,000.30 443.6 495.1 580.2
2013 3,358.10 436.2 2,921.80 1,233.40 136.3 1,552.10 1,074.80 477.3 532.1 628.5
Historical estimates Per capita amount
1990 $2,738 $540 $2,198 $919 $168 $1,111 $758 $353 —5 —5
1998 4,179 637 3,542 1,391 257 1,894 1,339 556 —5 —5
1999 4,402 664 3,738 1,486 261 1,991 1,391 599 —5 —5
2000 4,670 687 3,983 1,603 260 2,121 1,483 637 —5 —5
2001 5,021 709 4,313 1,752 256 2,306 1,627 679 —5 —5
2002 5,440 744 4,696 1,925 271 2,499 1,768 731 —5 —5
Projected
2003 5,808 788 5,020 2,105 281 2,634 1,857 777 —5 —5
2004 6,167 836 5,332 2,257 291 2,784 1,957 827 —5 —5
2005 6,546 889 5,657 2,409 302 2,945 2,062 883 —5 —5
2006 6,972 945 6,027 2,575 317 3,135 2,189 946 —5 —5
2007 7,431 1,002 6,429 2,752 333 3,344 2,329 1,015 —5 —5
2008 7,928 1,062 6,866 2,947 350 3,569 2,481 1,088 —5 —5
2009 8,446 1,125 7,321 3,143 367 3,811 2,646 1,166 —5 —5
2010 8,984 1,190 7,795 3,338 384 4,072 2,825 1,248 —5 —5
2011 9,543 1,255 8,288 3,538 401 4,349 3,015 1,334 —5 —5
2012 10,110 1,322 8,789 3,730 417 4,641 3,215 1,426 —5 —5
2013 10,709 1,391 9,318 3,933 435 4,950 3,428 1,522 —5 —5
Historical estimates Percent distribution
1990 100 19.7 80.3 33.5 6.1 40.6 27.7 12.9 15.8 10.6
1998 100 15.2 84.8 33.3 6.2 45.3 32 13.3 18.3 14.9
1999 100 15.1 84.9 33.8 5.9 45.2 31.6 13.6 17.5 15.3
2000 100 14.7 85.3 34.3 5.6 45.4 31.8 13.6 17.2 15.5
2001 100 14.1 85.9 34.9 5.1 45.9 32.4 13.5 17.4 15.8
2002 100 13.7 86.3 35.4 5 45.9 32.5 13.4 17.2 16.1
Projected
2003 100 13.6 86.4 36.3 4.8 45.4 32 13.4 16.8 16.1
2004 100 13.5 86.5 36.6 4.7 45.1 31.7 13.4 16.5 16.3
2005 100 13.6 86.4 36.8 4.6 45 31.5 13.5 16.1 16.6
2006 100 13.6 86.4 36.9 4.5 45 31.4 13.6 15.9 16.9
2007 100 13.5 86.5 37 4.5 45 31.3 13.7 15.7 17.1
2008 100 13.4 86.6 37.2 4.4 45 31.3 13.7 15.6 17.4
2009 100 13.3 86.7 37.2 4.3 45.1 31.3 13.8 15.6 17.6
2010 100 13.2 86.8 37.2 4.3 45.3 31.4 13.9 15.6 17.9
2011 100 13.2 86.8 37.1 4.2 45.6 31.6 14 15.6 18.2
2012 100 13.1 86.9 36.9 4.1 45.9 31.8 14.1 15.7 18.4
2013 100 13 87 36.7 4.1 46.2 32 14.2 15.8 18.7

hospitals had closed obstetric wards (units devoted to care of expectant mothers), clinics, and trauma services in response to soaring malpractice costs. The article cited an American Hospital Association (AHA) survey finding that more than thirteen hundred health care institutions had been affected by the costs of malpractice insurance, and the AHA claimed that in some states, such as New Jersey, insurance costs nearly doubled during 2001.

1The health spending projections were based on the 2002 version of the National Health Expenditures (NHE) released in January 2004.
2Includes Medicaid SCHIP Expansion and SCHIP.
3Subset of Federal funds.
4Subset of Federal and State and local funds. Includes Medicaid SCHIP Expansion.
5Calculation of per capita estimates is inappropriate.
Notes: Per capita amounts based on July 1 Census resident based population estimates. Numbers and percents may not add to totals because of rounding.
SOURCE: "Table 3. National Health Expenditures; Aggregate and Per Capita Amounts, Percent Distribution and Average Annual Percent Change by Source of Funds: Selected Calendar Years 1990–2013," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections-2003/t3.asp (accessed July 2, 2004)
Historical estimates Average annual percent change from previous year shown
1990 — — — — — — — — — —
1998 6.5 3.1 7.2 6.4 6.5 8 8.4 6.9 8.4 11.1
1999 6.3 5.2 6.5 7.8 2.5 6 4.9 8.8 1.6 8.9
2000 7.1 4.4 7.6 8.9 0.5 7.5 7.6 7.3 5.4 8.9
2001 8.5 4.1 9.2 10.3 −0.9 9.7 10.7 7.5 9.5 10.2
2002 9.3 6 9.9 10.9 7.2 9.4 9.7 8.7 8.4 11.7
Projected
2003 7.8 6.8 7.9 10.4 4.4 6.4 6 7.2 5.2 7.5
2004 7.2 7.1 7.2 8.2 4.5 6.7 6.3 7.5 5.1 8.7
2005 7.1 7.3 7.1 7.7 4.9 6.8 6.3 7.8 4.8 9
2006 7.5 7.2 7.5 7.8 5.8 7.4 7.1 8 6.1 9.2
2007 7.5 7 7.6 7.8 6 7.6 7.3 8.2 6.4 9.2
2008 7.6 6.9 7.7 8 5.9 7.6 7.4 8.1 6.8 9.1
2009 7.4 6.8 7.5 7.5 5.7 7.7 7.5 8 7.1 9
2010 7.3 6.6 7.3 7.1 5.6 7.7 7.6 7.9 7.4 8.8
2011 7.1 6.3 7.2 6.8 5.3 7.7 7.6 7.8 7.5 8.7
2012 6.8 6.2 6.9 6.3 5 7.6 7.5 7.7 7.4 8.5
2013 6.7 6.1 6.9 6.3 5 7.5 7.4 7.6 7.5 8.3

Other factors include advanced biomedical procedures requiring high-technology expertise and equipment; redundant (excessive and unnecessary) technology in hospitals; cumbersome medical insurance programs and consumer demand for less restrictive insurance plans (ones that offer more choices, benefits, and coverage, but usually mean higher premiums); and consumer demand for the latest and most comprehensive testing and treatment. Legislation that increased Medicare spending and the growing number of older adults who utilize a disproportionate amount of health care services also acted to accelerate health care spending.

In an article in the August 10, 2002, issue of the New York Times, Drew Altman, president of the Kaiser Family Foundation, a health care research organization, expressed a concern shared by many health care industry observers. "No one has a big new answer about what to do about health care costs. And it's all made worse because health costs are rising in bad economic times," Altman said. Some industry observers believe that combating health care inflation requires a major shift in how American health care providers and consumers approach health care delivery. They feel Americans must learn to use health care services wisely, choosing only treatments that have proven effective and accepting that bigger facilities and more treatment do not necessarily produce better health.

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