Factors Contributing to Rising Health Care Costs

In a recent post, I compared the health care proposals of Sen. Obama and Sen. Obama. However, to evaluate those proposals, I think we need an understanding of the factors that contribute to rising health care costs. According to the National Coalition on Health Care, costs are expected to continue rising at pace far greater than inflation for the at least the next ten years, reaching approximately 20% of the GDP.

The primary contributing factors appear to be as follows:

a. Rising cost of prescription drugs. The Laborer’s Health and Safety Fund of North America reports that

Up to 20 percent of the increase in healthcare costs may be attributed to prescription drug costs. In addition to the availability of new drugs, a dramatic increase in advertising aimed at consumers, particularly television advertising, has boosted the cost of drugs. In 2002, larger pharmaceutical manufacturers spent 14 percent of their revenue on research and development and 31 percent on marketing and administration.

b. Advances in medical technology. Rather than make treatments cheaper, advances in medical technology appear to increase demand and raise prices. The new technologies increase the range of treatments available and make them less invasive with faster recovery times. Business Week reports,

The California Healthcare Foundation says medical price inflation, not increased use, drives 51% of the growth in health-care spending. The federal Agency for Healthcare Research & Quality (AHRQ) found that from 2000 to 2004, the mean cost of a hospital stay per patient rose 15%.

c. Greater longevity. Advances in medical technology increase longevity, which in turn increases the window of time for more medical situations to occur. Further, the chances are increased that an extremely expensive, ultimately incurable condition will be what does a person in.

c. Aging of the population. As a greater percentage of the population becomes older, the average medical conditions per person rises

d. Lack of awareness of the real costs of treatments. Due to health insurance, many people are not aware of, or do not care about, the actual costs of various treatments. According to Business Week,

The Congressional Budget Office has estimated that less than half of all medical treatments are supported by rigorous evidence proving they work. And cost-benefit analysis, required by many countries before a new treatment can be approved, is almost taboo in the U.S. The Food & Drug Administration is forbidden by law from considering the cost of a new device or drug when deciding whether to approve it. Thus treatment with the new generation of highly individualized, targeted cancer drugs, such as Genentech’s (DNA) Avastin or ImClone’s (IMCL) Erbitux, can cost $100,000 or more, though they add only a few months of life for most patients. They do offer, however, a slim chance of a longer benefit to some patients. So cancer victims demand them, and doctors recommend them in the hope they might get lucky.

That doesn’t happen in countries with universal health care. In Europe, for example, the cost-benefit of a new treatment is part of its evaluation.

These factors are shown graphically below.

Factors Contributing to Rising Healthcare Costs

These factors can be updated as new information is covered, but they are probably a good outline of the general situation. Thus, they provide a starting point for evaluating which of the proposed solutions, by presidential candidates or others, offers the best chance of actually addressing the root causes.

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