Why Do Healthcare Costs Keep Rising? (2024)

Americans now spend close to $13,000 on average on healthcare each year. High insurance premiums, high deductibles, and other out-of-pocket expenses are just some of the costs associated with health and wellness in the country, and those costs are only going higher.

One reason for rising healthcare costs is government policy. Since the inception of Medicare for retired Americans and Medicaid for low-income people, providers have been able to increase prices with the knowledge that the government, not the individual, will be paying the bills.

Still, there’s much more to rising healthcare costs lately, including the impact of the COVID-19 pandemic on the cost structure.

Overall Costs of Healthcare

Healthcare costs have risen dramatically in the United States over the past several decades. According to the Commonwealth Fund, healthcare spending as a percentage of GDP rose from 8.2% in 1980 to 17.8% in 2021.

Americans are not getting better outcomes for their money compared to their peers. Americans had the highest death rate due to COVID-19 among its peer nations. They have a lower life expectancy, a higher rate of avoidable deaths, and the highest rates of infant and maternal deaths.

But the costs in dollars are only going up. In 2023, healthcare spending is expected to rise by 5.1%, from $4.2 trillion in 2022, according to the Centers for Medicare and Medicaid Services.

Where does that money go? According to the U.S. Centers for Medicare and Medicaid Services (CMS), healthcare spending can be broken down into 10 categories:

• Hospital care (31%)
• Physician services (20%)
• Prescription drugs (10%)
• Other personal healthcare costs (5%)
• Nursing care facilities (5%)
• Dental services (4%)
• Home healthcare (3%)
• Other professional services (3%)
• Other non-durable medical products (2%)
• Durable medical equipment (2%)

Why Are Healthcare Costs Rising?

A 2023 study by the Peter G. Peterson Foundation blamed rising prices on three big factors: population growth, population aging, and rising prices for healthcare products and services.

An earlier study by the Journal of the American Medical Association (JAMA) adds additional factors, citing an increase in chronic illnesses and the rising costs of health insurance, among others.

The Aging Population

Healthcare gets more expensive as the population expands, particularly when the growth is attributable to longer lifespans.

Older people spend more on healthcare than younger people, and they tend to require more expensive procedures, such as knee replacements and heart bypass surgery.

Americans aged 65 and over represented 16% of the population in 2021, and that number is expected to reach 20% by 2030.

Therefore, it’s not surprising that 50%of the increase in healthcare spending comes from increased costs for services, especially inpatient hospital care.

Increase in Chronic Illnesses

The authors of the JAMA studypoint to diabetes as the medical condition responsible for the greatest increase in spending over the study period, which was 1996 through 2013.

The increased cost of diabetes medications alone was responsible for $44.4 billion of the $64.4 billion increase in costs to treat that disease.

After diabetes, conditions with the greatest increase in costs were:

• Lower back and neck pain: $57.2 billion
• High blood pressure: $46.6 billion
• High cholesterol: $41.9 billion
• Depression: $30.8 billion
• Urinary disease: $30.2 billion
• Osteoarthritis: $29.9 billion
• Bloodstream infection: $26 billion
• Falls: $26 billion
• Oral disease: $25.3 billion

Increased Ambulatory Costs

Ambulatory care, including outpatient hospital services and emergency room care, increased the most of all treatment categories studied.

To some extent, that is a transferral of services from inpatient hospital care to outpatient care.

The trend speeded up during the COVID-19 pandemic when healthcare providers moved to virtual services to avoid crowded waiting rooms.

Rising Insurance Premiums

The average annual premium for health insurance in 2022 was $7,911 for single people. For family coverage, it averaged $22,463 for family coverage, a 43 percent increase since 2012.

The high cost of American health insurance has a number of causes. The website eHealth cites administrative costs, increasing prices for prescription drugs, and "lifestyle choices."

Rising Government Costs

Nearly 92% of Americans now have health insurance.

That's the good news.

Government programs like Medicare, Medicaid, and the Affordable Care Act have increased overall demand for medical services, resulting in higher prices as well.

What’s more, increases in the incidence of chronic conditions such as diabetes and heart disease, especially among seniors, have had a direct impact on increases in the cost of medical care. Chronic diseases constitute 85% of healthcare costs, and more than half of all Americans havea chronic illness.

Higher Out-of-Pocket Costs

Higher insurance premiums are only part of the picture. Americans are paying moreout of pocket than ever before.

A shift to high-deductible health plans (HDHPs) that require out-of-pocket payments of up to $14,000 per family has added greatly to the cost of healthcare.

Employer contributions to HDHPs help to mitigate the higher deductible. According to one study, HDHP enrollees paid 20% of their total premium while preferred provider organization (PPO) enrollees paid up to 27% of theirs.

The Fear Factor

Avoidance of medical care due to concerns about unpredictable costs has been a problem for some years. A 2019 survey by the Physicians Advocacy Institute (PAI) found patients avoiding care due to anxieties about the potential costs of deductibles under their HDHPs.

The COVID-19 pandemic made it worse. A Kaiser Family Foundation poll suggests that up to 50% of the public has either avoided or postponed medical care due to concerns about exposure to COVID-19, further exacerbating the problem.

Avoiding care results in higher overall healthcare costs, as the delay makes treatable conditions more costly to treat.

Cost of COVID-19

COVID-19, with the increased need for testing, treatment, and care, was expected to change the cost of healthcare, although experts didn't agree on whether it would cause costs to rise or fall.

In fact, early on, healthcare spending fell, mostly due to patients postponing treatment for other illnesses. More recently, utilization and spending have rebounded.

In the grand scheme of things, COVID may not alter the trajectory of healthcare spending a great deal. Though short-term spending fell, it is expected to grow at an average annual rate of 5.4% and reach $6.2 trillion by 2028.

Patching U.S. Healthcare

There have been recent attempts to patch the U.S. healthcare system. In particular, they address the lack of transparency that drives some people to avoid going to the doctor and others saddled with unexpected debt.

Lack of Transparency

From the view of the consumer, it’s difficult to predict the actual cost of healthcare. Most people know the cost of care is going up, but with few details and complicated medical bills, it’s not easy to know what you’re getting for your money.

That lack of transparency in healthcare was addressed in the Consolidated Appropriations Act (CAA) of 2021. One section of this act removes gag clauses related to price and quality information. Another, targeting health insurance, requires disclosure of direct and indirect compensation for brokers and consultants to the insurance companies.

The law became effective on Jan. 1, 2022.

The No Surprises Act

Additional CAA legislation, known as the No Surprises Act, addresses surprise billing. Another leading cause of rising healthcare costs, surprise billing can happen when a patient's treatment involves unanticipated out-of-network services, such as an anesthesiologist.

In addition to outlawing surprise medical and hospital bills, the act ends surprise air ambulance bills, requires transparency regarding in-network and out-of-network deductibles and out-of-pocket limitations, implements protections against provider discrimination, and requires an external review in the case of certain surprise bills.

Dispute resolution, patient protection, and transparency are mandated. Providers are required to issue fair and honest advance cost estimates.

This act also went into effect at the start of 2022.

The Bottom Line

Americans spend a huge amount on healthcare every year, and the costs keep rising. In part, this increase is due to the inception of national programs like Medicare, Medicaid, and the Affordable Care Act, which extended free or subsidized healthcare to many more Americans. There are also short-term factors, such as the 2020 financial crisis and the COVID-19 pandemic, that push up the cost of health insurance.

The fact remains that the U.S., with its dependence on private insurers, has a unique healthcare system and it has evolved into the world's most expensive.