The Rising Cost of Health Care by Year and Its Causes (2024)

In 2020, U.S. health care costs totaled $4.1trillion. That makes health care one of the country's largest expenses. Health spending accounted for 19.7% ofthe nation's gross domestic product (GDP).

In comparison, national health expenditures totaled $27.2 billion in 1960, just 5% of GDP. That translates to an annual health care cost of $12,530 per person in 2020 versus roughly $150 per person in 1960.

Keep reading to learn more about health expenditures and how the Affordable Care Act (ACA) aimed to control costs.

What Caused This Increase?

There were two causes of this massive increase: government policy and lifestyle changes.

Demand for Health Care Services

The government created programs likeMedicareand Medicaid to help those without the private insurance most Americans rely upon. These programs spurred demand for health care services. That gave providers the ability to raise prices.

A study in Health Affairs co-authored by Princeton University health economist Uwe Reinhardt found that Americans use the same amount of healthcare as residents of other nations. They just pay more for them.

Chronic Illnesses

Chronic illnesses, such as diabetes and heart disease, have increased.In 2020, the health care costs of people with at least one chronic condition were responsible for 86% of health care spending.More thanhalf of all Americana adults haveat least one of them.

These illnessesare expensive and difficult to treat.As a result, the sickest 5% of the population consumed 50% of total health care costs in 2019. The healthiest 50% only consumed 3% of the nation's health care costs.

The U.S. medical profession does a heroic job of saving lives, but it comes at a cost. Medicare spending for patients in the last year of life accounts for about 25% of the Medicare budget.

Government Policy

Between 1961 and 1965, health care spending increased by an average of 8.9% a year. That's because health insurance expanded. As it covered more people, the demand for health care services rose. By 1965, households paid out-of-pocket for 44% of all medical expenses. Health insurance paid for 24%.

From 1966 to 1973, health care spending rose by an average of 11.9% a year. Medicare and Medicaid covered more people and allowed them to use morehealth careservices. Medicaid allowed senior citizens to move into expensive nursing home facilities.

Asdemandincreased, so did prices. Health care providers put more money into research. It created more innovative, but expensive, technologies.

In 1971,President Nixonimplemented wage-price controls to stopmildinflation. Controls on health care prices created higher demand. In 1973, Nixon authorizedHealth Maintenance Organizations(HMO) to cut costs.

These prepaid plans restricted users to a particular medical group. The HMO ACT of 1973 provided millions of dollars in start-up funding for HMOs. It also required employers to offer them when available.

From 1974 to 1982, health care prices rose by an average of 14.1% a year for three reasons. First, pricesrebounded after the wage-price controls expired in 1974. Second,Congressexempted some corporations from regulation with the Employee Retirement Income Security Act of 1974, and companies offered lower-cost, flexible plans. Third, home health care took off, growing by 32.5% a year.

Between 1983 and 1992, health care costs rose by an average of 9.9% each year.Home health careprices increased by 18.3% per year.

In 1986, Congress passed the Emergency Medical Treatment and Labor Act. It forced hospitals to accept anyone who showed up at the emergency room. Prescription drug costs rose by 12.1% a year. One reason is that the FDA allowed prescription drug companies to advertise on television.

In the early 1990s, health insurance companies tried to control costs by spreading the use of HMOs once again. Congress then tried to control costs with the Balanced Budget Act in 1997. Instead, it forced many healthcare providers out of business.

Because of this, Congress relented on payment restrictions in the Balanced Budget Refinement Act in 1999 and theBenefits Improvement and Protection Act of 2000.The act also extended coverage to morechildren through theChildren's Health Insurance Program.

After 1998, people rebelled and demanded more choice in providers. As demand increased again, so did prices. Between 1997 and 2007, drug prices tripled, according toa study in Health Affairs.

One reason is that pharmaceutical companies invented new types of prescription drugs. They advertised straight to consumers and created additional demand.The number of drugs with sales that topped $1 billion increasedto 52 in 2006 from six in 1997.

The U.S. government approved expensive drugs even if they were not much better than existing remedies. Other developed countries were more cost-conscious.

In 2003, the Medicare Modernization Act addedMedicare Part Dto cover prescription drug coverage. It also changed the name of Medicare Part C to theMedicare Advantageprogram, and the number of people using those plans increased to 28 million by 2022.Those costs rose faster than the cost of Medicare itself.

The nation’s reliance on the health insurance model increased administration costs.Various studies havefound thatadministration makes up about 15% to 25% of U.S.healthcare costs. That's twice the administrative costs in Canada.

About half of those administrative costs in the U.S. are due to the complexity of billing. About half of those administrative costs in the U.S. are due to the complexity of billing. For example, in a 2018 JAMA study, U.S. physicians used 14.5% of their primary care revenue on administrative billing costs.

A big reason is that there are so many types of payers. In addition to Medicare and Medicaid, there are thousands of different private insurers. Each has its own requirements, forms, and procedures.

Hospitals and doctors must also chase down people who don't pay their portion of the bill. That doesn't happen in countries with universal healthcare.

The reliance on corporate private insurance created healthcare inequality. Those without insurance often couldn't afford visits to a primary care physician. By 2009, half of the people (46.3%) who visited an emergency room said they went because they had no other place to go for healthcare.

Preventable Chronic Diseases

The second cause of rising healthcare costs is anepidemic of preventable diseases. The four leading causes of non-accidental death are heart disease, cancer, COVID-19, and chronic obstructive pulmonary disorder, as of October 2022. Chronic health conditions cause most of them.

These issues can either be prevented or would cost less to treat if caught in time. Risk factors for heart disease and strokes are poor nutrition and obesity. Smoking is a risk factor for lung cancer (the most common type) and COPD. Obesity is also a risk factor for other common forms of cancer.

These diseases are difficult to manage becausepatients get tired of taking the medications. Thosewho cut back find themselves in the emergency room with heart attacks, strokes,and other complications.

How the ACA Slowed the Rise of Healthcare Costs

By 2009, rising healthcare costs were consuming the federal budget. Medicare and Medicaid cost $671 billion in 2008. Payroll taxes cover less than half of Medicare and none of Medicaid.

This is part of so-calledmandatory spendingalso generally includes federal and veterans' pensions,welfare, and interest on the debt. It consumed 60% of thefederal budget. Congress knew something had to be done to rein in these costs.

Federal healthcare costs are part of themandatory budget. That means they must be paid. As a result, they are eating up funding that could have gone todiscretionary budgetitems, such asdefense, education, or rebuilding infrastructure.

Obamacare'sgoal is to reduce these costs. First, it required insurance companies to providepreventive carefor free so patients could treat chronic conditions before requiring expensive hospital emergency room treatments. It also reduced payments toMedicare Advantageinsurers.

From 2010, when theAffordable Care Actwas signed, through 2019, healthcare costs rose by 4.2% a year.It achieved its goal of lowering the growth rate of healthcare spending.

In 2010, the government predicted that Medicare costs would rise by 20% in just five years. That’s from $12,376 per beneficiary in 2014 to $14,913 by 2019.Instead, analysts were shocked to find out spending had dropped by over $1,200 per person, to $11,167 by 2014.

This price decrease happened due to four specific reasons:

1. The ACA reduced payments to Medicare Advantage providers. The providers' costs for administering Parts A and B were rising much faster than the government’s costs. The providers couldn't justify the higher prices and appeared as though they were overcharging the government.
2. Medicare began rolling out accountable care organizations, bundled payments,and value-based payments. Hospital readmissions dropped by 150,000 in both 2012 and 2013; hospitals increased efficiency and quality of care to avoid penalties for those who underperform.
3. High-income earners paid more in Medicare payroll taxes and Part B and D premiums.
4. In 2013, sequestration lowered Medicare payments by 2% to providers and plans.
   

Inflation Reduction Act

In 2022, the Inflation Reduction Act took effect. The wide-ranging bill included several components designed to soften the rise of health care costs for average consumers. While the details vary by state, the nationwide effects include capping prescription drug costs at $2,000, allowing Medicare to negotiate costs with drug companies, and limiting drug price hikes to the broader inflation rate.

Healthcare Costs by Year