Economics

3 reasons why health care spending is so high

The U.S. spent about $3.3 trillion on health care in 2016. That represents about $10,348 per person, as summarized in a recent AMA Policy Research Perspective on trends in health spending. Learn more about three reasons for the rising costs of health care.

Administrative costs

Health care spending accounts for nearly 18% of the gross domestic product. Eight percent of that spending goes toward “administration and governance,” which includes activities relating to planning, regulating and managing health system payment and insurance systems, according to a March 2018 JAMA report. By comparison, only 1% of health spending goes toward such costs in France and Japan.

For physicians and hospitals, insurance company prior-authorization (PA) requirements can be a huge administrative expense. For example, the Cleveland Clinic reported that it had 175 “caregivers” assigned to PA-processing tasks in 2015 at a cost of $9 million. And medical practices report spending an average of two business days a week per physician to comply with health plans’ prior-authorization requirements.

The AMA advocates for administrative simplification and has outlined reforms to lessen the burdens of prior authorization.

Another cost relates to the administration of justice. Our medical liability system causes health care expenditures to be higher than they otherwise would be. This is called “defensive medicine.” That is why the AMA is working to reshape the current medical liability system to better serve patients and physicians.

Prescription drugs

The U.S. spends nearly $330 billion a year on prescription drugs. The share the nation spends for pharmaceuticals has risen significantly, accounting for 5.6% of total health spending in 1990 and growing to nearly 10% in 2016.

Three major market players contribute to spiking drug prices:

  • Pharmaceutical companies make and sell drugs, but don’t explain pricing or why costs can greatly exceed research-and-development expenses. Some even buy existing drugs, spend nothing on R&D, and still raise prices.
  • Pharmacy benefit managers (PBMs) strike deals between drug makers and health insurers. These middlemen don’t share their pricing agreements and it’s unknown if savings ever reach patients.
  • Health insurance companies approve treatments, set co-pays, and price out with PBMs how much patients pay for drugs. Often, they decide coverage options based on what maximizes company profits.

The AMA’s TruthinRx campaign is working to expose the opaque process that pharmaceutical companies, PBMs and health insurers engage in when pricing prescription drugs and to rally grassroots support to call on lawmakers to demand drug price transparency.

Chronic disease

A November 2017 JAMA study linked chronic disease in the U.S. population to an 11.6% increase in health care spending between 1996 and 2013. Two of the top three fastest-growing conditions, in terms of costs, were diabetes and hypertension.

Annual spending on diabetes care grew by $64.4 billion during this period, with $44.4 billion of that tied to spending on drugs. More people are living with diabetes, and they are generally older. They are prescribed more drugs to properly treat their condition, and the costs of those drugs keep increasing. Hypertension, meanwhile, saw a $47.6 billion growth in spending during this same period.

Learn how the AMA is working to prevent chronic diseases such as type 2 diabetes and heart disease.