Costs of health care

Health care system in the U.S. has a vast number of players. There are hundreds, if not thousands, of insurance companies in the U.S. This system has considerable administrative overhead, far greater than in nationalized, single-payer systems, such as Canada's. An oft-cited study by Harvard Medical School and the Canadian Institute for Health Information determined that some 31% of U.S. health care dollars, or more than $1,000 per person per year, went to health care administrative costs, nearly double the administrative overhead in Canada, on a percentage basis.

According to the insurance industry group America's Health Insurance Plans, administrative costs for private health insurance plans have averaged approximately 12% of premiums over the last 40 years. There has been a shift in the type and distribution of administrative expenses over that period. The cost of adjudicating claims has fallen, while insurers are spending more on other administrative activities, such as medical management, nurse help lines, and negotiating discounted fees with health care providers.

A 2003 study published by the Blue Cross and Blue Shield Association also found that health insurer administrative costs were approximately 11% to 12% of premiums, with Blue Cross and Blue Shield plans reporting slightly lower administrative costs, on average, than commercial insurers. For the period 1998 through 2003, average insurer administrative costs declined from 12.9% to 11.6% of premiums. The largest increases in administrative costs were in customer service and information technology, and the largest decreases were in provider services and contracting and in general administration. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21% of the estimated total excess spending ($477 billion in 2003).

According to a report published by the CBO in 2008, administrative costs for private insurance represent approximately 12% of premiums. Variations in administrative costs between private plans are largely attributable to economies of scale. Coverage for large employers has the lowest administrative costs. The percentage of premium attributable to administration increases for smaller firms, and is highest for individually purchased coverage.A 2009 study published by the Blue Cross and Blue Shield Association found that the average administrative expense cost for all commercial health insurance products was represented 9.18% of premiums in 2008. Administrative costs were 11.12% of premiums for small group products and 16.35% in the individual market.

One study of the billing and insurance-related (BIR) costs borne not only by insurers but also by physicians and hospitals found that BIR among insurers, physicians, and hospitals in California represented 20-22% of privately insured spending in California acute care settings.

Third-party payment problem and consumer-driven insurance

Most Americans pay for medical services largely through insurance, and this can distort the incentives of consumers since the consumer pays only a portion of the ultimate cost. The lack of price information on medical services can also distort incentives. The insurance which pays on behalf of insureds negotiate with medical providers, sometimes using government-established prices such as Medicaid billing rates as a reference point. This reasoning has led for calls to reform the insurance system to create a consumer-driven health care system whereby consumers pay more out-of-pocket. In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act was passed, which encourages consumers to have a high-deductible health plan and a health savings account.

Overall costs

The cost impact of the existing mixed public-private system is subject to debate. The United States spends more as a percentage of GDP than similar countries, and this can be explained either through higher prices for services or more utilization of these services (for example, due to the United States having a more sickly population), or to a combination of the two. The United States has higher prices than other "rich democracies", and this is a major explanation for its increased costs.

Free-market advocates claim that the health care system is "dysfunctional" because the system of third-party payments from insurers removes the patient as a major participant in the financial and medical choices that affect costs. Because government intervention has expanded insurance availability through programs such as Medicare and Medicaid, this has exacerbated the problem. According to a study paid for by America's Health Insurance Plans (a Washington lobbyist for the health insurance industry) and carried out by PriceWaterhouseCoopers, increased utilization is the primary driver of rising health care costs in the U.S. The study cites numerous causes of increased utilization, including rising consumer demand, new treatments, more intensive diagnostic testing, lifestyle factors, the movement to broader-access plans, and higher-priced technologies. The study also mentions cost-shifting from government programs to private payers. Low reimbursement rates for Medicare and Medicaid have increased cost-shifting pressures on hospitals and doctors, who charge higher rates for the same services to private payers, which eventually affects health insurance rates.

Health care costs rising far faster than inflation have been a major driver for health care reform in the United States.

In March 2010, Massachusetts released a report on the cost drivers which it called "unique in the nation". The report noted that providers and insurers negotiate privately, and therefore the prices can vary between providers and insurers for the same services, and it found that the variation in prices did not vary based on quality of care but rather on market leverage; the report also found that price increases rather than increased utilization explained the spending increases in the past several years.