Health Care Cost Drivers

U.S. health care spending now accounts for 16% of GDP and is expected to rise to 25% by 2025. Health care costs are consuming an ever greater portion of our federal budget. Medicare and Medicaid account for a large and growing share of federal spending—23% last year—and 6% of GDP, but if their rate of growth continues unabated, that share is expected to substantially increase: to 9% of GDP by 2035 (or 30% of total spending on health care) and to 19% of GDP (38% of total health care spending) by 2082.1

Evidence suggests that the core cost drivers in health care are:

  • More Americans are chronically ill. According to the CDC, in 2005, more than half of all Americans lived with at least one chronic disease. As obesity prevalence has increased among Americans, so have rates of associated chronic conditions.  A staggering amount of US health care spending—75%— is for treatment of adults and children with chronic disease. Two-thirds of the growth in these costs over the last two decades results from the rise in prevalence of treated disease.2 Rising rates of obesity accounted for 27% of the rise in health spending from 1997 to 2005, more than $223 billion dollars.3

    Chronic diseases are the basis for the vast majority of program health spending: 96 cents of every dollar the program disburses for care and 83 cents of every dollar of Medicaid.4
  • Many Americans receive a lot of care, but it isn’t necessarily the right care.  The United States spends more money per capita than any other industrialized nation,5 but we are last in preventable mortality.6   Chronically ill patients receive only 56% of clinically recommended health care.7

    The value of much health spending is uncertain. Some spending may post solid returns on investment, some may not. Comparative effectiveness research is critical to better understanding what works, for whom, under what conditions, and why. Proposals for a national center focused on this research have recently received renewed attention in Congress.  Rationalizing health spending requires this information.8
  • Administrative inefficiencies associated with a fragmented healthcare financing and delivery system create more paperwork, redundant care, and increases in medical errors. Net administrative costs currently account for over 12% of private health care spending in the U.S.9  These expense s vary widely by firm size, ranging from about 10% in the largest groups to nearly 50% in the individual market and in groups of fewer than ten. 

The average administrative cost in public insurance programs is far lower—about 7%10—although costs vary, even within programs such as Medicare.  Traditional Medicare administrative costs are just 2%-5% of total program budget, but estimated administrative costs of private plans serving Medicare beneficiaries are 11%–13%.11