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INSIGHTS BLOG > Why Are Healthcare Costs So High? - Part 2

Why Are Healthcare Costs So High? - Part 2

Written on 10 November 2012

Ruth Fisher, PhD. by Ruth Fisher, PhD

Healthcare Expenditures Are Concentrated

High-Cost Healthcare Users

Causes of Common Chronic Conditions

Addressing the High Costs of Healthcare


In my previous blog entry, Why Are Healthcare Costs So High? - Part 1, I presented data indicating that

  • US healthcare expenditures have been increasing over time (see Figure 1 below reproduced from my previous blog entry),
  • There seems to be a shift during the 1980s, in which annual personal expenditures on healthcare started increasing at a faster rate (see Figure 1 below reproduced from my previous blog entry),
  • Healthcare expenditures for treating the top 20 medical conditions account for 75% of expenditures captured in surveys of healthcare expenditures for hospital inpatients, patients treated in physicians’ offices, and prescription medication, and
  • The increases in spending for the top 20 diseases are due mostly to increases in the number of people being treated for (chronic) diseases, rather than to increases in per-patient costs of treatment (see Figure 2 below reproduced from my previous blog entry).

In this blog entry I examine the distribution of healthcare spending across different portions of the population.



Figure 1

Figure 2


Healthcare Expenditures Are Concentrated

Many studies have noted that, regardless of payer (government, private insurance, out-of-pocket), a significant portion of US healthcare expenditures are concentrated among a few high-intensity healthcare users. In particular, the Congressional Budget Office (CBO) published a paper in 2005, “High-Cost Medicare Beneficiaries,” in which it stated

A high degree of concentration of expenditures is not unique to the Medicare population. Health care expenditures in the general population show similar patterns. In fact, they are even more concentrated: in 1996, for example, the costliest 5 percent of the U.S. population accounted for 55 percent of total health care spending.

I obtained the referenced study from which the CBO obtained it 55% figure, Marc L. Berk and Alan C. Monheit (2001), “The Concentration of Health Care Expenditures, Revisited.” The study also provided other similar estimates The figure reproduced below, “Exhibit 1”, is reproduced from the Berk and Monheit study.

I took the numbers from Exhibit 1 and imputed values for years in-between the estimates reported in Exhibit 1. I then applied these distribution estimates to the Total US Personal Healthcare Expenditures (described in my previous blog entry). That gave me estimates of average per-person annual healthcare expenditures for the different population groups, which are presented in Figure 3. The growth rates of these per-capita expenditures across the different groups as of the 1970-1974 time period are displayed in Figure 4.

Figure 3

Figure 4

Figures 3 and 4 indicate that average annual per-capita annual health expenditures for the Top 1% of healthcare users at the end of the period, just under $190,000 in 2010, are almost four times those at the beginning of the period, just under $50,000 during 1970-1974 to . At the bottom end of the scale, in contrast, average annual per-capita annual health expenditures for the half of the population with the lowest annual healthcare expenditures at the end of the period, $418 in 2010, are just over three times those at the beginning of the period, $135 during 1970-1974,

The average expenditures for all healthcare users at the end of the period, about $7,000 during 2010, were almost four times their value at the beginning of the period, $1,826 during 1970-1974.

More generally, expenditures by people in the top 5% of healthcare users groups (Top 1%, Next 1%, and Next 3%) increased by slightly greater amounts during the 1970-4 through 2010 period (2.5 to 3.5 times), than did expenditures by people in the bottom 90% of healthcare users groups (Next 20%, Next 20%, and Bottom 50%) (2.0 to 2.5 times).

Switching gears a bit, during the period of study, public (Medicare, Medicaid, etc) and private healthcare insurance has the primary payer for healthcare services. As seen in Figure 5, out-of-pocket costs have decreased over time from about 54% of total expenditures on healthcare during the 1960-1964 period to 14% in 2010 , while health insurance has increased from 30% to 78%.

Figure 5


In my last blog post, I noted that the total costs of healthcare paid by an individual can be divided into two pieces:

Total Cost of Healthcare = Insurance Premiums + Out-of-pocket Costs

Roughly speaking, the annual insurance premium an individual pays is the average of the total annual costs paid by his insurance company for the healthcare costs incurred by all individuals in his (age) group. What this means is that if the healthcare costs of one individual rise, then that individual does not bear the full burden of the cost increase, but rather, the burden is shared by all members of the group. This is the very nature of risk-pooling, and it works fine when all the members in the group face the same risks.

Insurance companies generally group their customers by age, where all people within the same (age) group pay rough the same amount for insurance. If I assume that out-of-pocket costs are small relative to insurance premiums, and they have been for some time now, then total customer payments for insurance can be roughly approximated by the total costs of healthcare services.

For the next analysis I make this assumption, that is, that total customer payments for insurance can be roughly approximated by the total costs of healthcare services. The assumption is good enough to put a crude estimate (more accurate in recent years than in past years) on the amount of money low-cost healthcare users are paying to subsidize high-cost healthcare users.

Returning now, we know that healthcare expenditures are concentrated among a small group of high-intensity users. What this means is that when you put all users -- high-intensity users and low-intensity users alike -- into the same group and average out the costs, then the low intensity users end up paying more for insurance premiums than they use in healthcare services, while the high intensity users pay less in insurance than the cost of care they receive.

What if we were to remove the high intensity users from the group and re-average out everybody else. What would be the difference in insurance premiums between including the high intensity users and excluding them?

This results of doing exactly this are presented in Figures 6 and 7.

The “All” group shows the average per-capita healthcare expenditures when all users are averaged together, which is roughly what the insurance companies do now.

The “All Less Top 1%” group shows the average per-capita healthcare expenditures when all users, excluding just the Top 1% of highest-intensive healthcare users, are averaged together. And similarly for the “All Less Top 2%”, “All Less Top 5%”, and “All Less Top 30%” groups.

Figure 6

Figure 7

The difference between the “All Less Top 1%” per-user expenditures and the “All” per-user expenditures provides a rough estimate of the extra amount that the Bottom 99% of the population pays in healthcare insurance premiums to support the Top 1%. As seen in the third (bottom) panel of Figure 7, when the Top 1% is removed from the calculations, the Bottom 99% of the population pays about 25% less in healthcare expenditures (which I assume roughly approximate insurance costs). If we take the Top 5% of users out of the calculations, then the Bottom 95% of the population would pay less than half of what they currently pay. In other words, the Bottom 95% of the population is paying roughly twice as much for healthcare services than they actually use, where the difference is going to subsidize the Top 5% of healthcare users. And if we take out the Top 30% of the population, the Bottom 70% of the population would pay roughly only about 14% of what they currently pay; so the Bottom 70% of the population is paying seven times as much as they use, where the difference is going to subsidize the Top 30% of healthcare users.


High-Cost Healthcare Users

So who are these people who use so much healthcare? Most people would probably think that these high-intensity users are generally elderly people on their deathbeds. In fact, however, Berk and Monheit characterize the 1996 Top 1% users as follows:

Age and health status are certainly associated with the probability of being in this group [the Top 1%]. Of those with high expenditures, 46.3 percent are elderly; the elderly comprise only 12.7 percent of the total noninstitutionalized population ... Similarly, those in fair or poor health comprise 48.6 percent of the high users but only 11 percent of the U.S. population. Thus, the majority of persons in the highest 1 percent of spenders are not elderly. Furthermore, most of the highest 1 percent of spenders do not consider themselves to be in fair or poor health.

The 2005 CBO study referenced earlier indicates that for Medicare beneficiaries (whose spending comprised about 20% of all healthcare spending in 2005) the high cost users suffer from chronic conditions, and in many cases more than one:

The prevalence of chronic conditions, which typically require ongoing care and treatment to maintain health and functional status and to slow the progression of the disease, was also strongly linked to high expenditures and the use of medical resources. More than 75 percent of high-cost beneficiaries were diagnosed with one or more of seven major chronic conditions in 2001. More than 40 percent of high-cost beneficiaries had coronary artery disease, and about 30 percent had each of three other conditions—diabetes, congestive heart failure, and chronic obstructive pulmonary disease. All of those conditions were much less prevalent among low-cost beneficiaries.

Mark W. Stanton, in “The High Concentration of US Health Care Expenditures,” indicates that in 2004, “Patients with multiple chronic conditions cost up to seven times as much as patients with only one chronic condition.”

And a 2009 report by the Social Security Advisory Board, “The Unsustainable Cost of Health Care,” indicates that “Patients with multiple chronic conditions account for a disproportionate share of spending, both in a given year and from year-to-year.”

What these studies jointly indicate is that the high-cost healthcare users are people with multiple, chronic conditions, including coronary artery disease, diabetes, congestive heart failure, and chronic obstructive pulmonary disease.


Causes of Common Chronic Conditions

My previous blog entry listed the Top 20 medical conditions that account for 75% of surveyed healthcare expenditures for, collectively, hospital inpatients, patients treated in physicians’ offices, and prescription medication. Most of the Top 10 conditions have causes and risk factors due to people’s lifestyle choices, that is factors under their direct control. This section contains a list of those medical conditions in the Top 10 whose risk factors are subject to individuals’ control.


1. Coronary Heart Disease

Definition: Coronary heart disease is caused by the buildup of plaque in the arteries to your heart. This may also be called hardening of the arteries…

Risk Factors: There are many heart disease risk factors that can be controlled. By making changes in your lifestyle, you can actually reduce your risk for heart disease. Controllable risk factors include:

    • Smoking.
    • High LDL, or "bad" cholesterol and low HDL, or "good" cholesterol.
    • Uncontrolled hypertension (high blood pressure).
    • Physical inactivity.
    • Obesity (more than 20% over one's ideal body weight).
    • Uncontrolled diabetes.
    • High C-reactive protein.
    • Uncontrolled stress and anger.


3. Cancer

Definition: Cancer is the uncontrolled growth of abnormal cells in the body. Cancerous cells are also called malignant cells.

Causes and Risk Factors: There are many causes of cancer, including:

    • Benzene and other chemicals
    • Drinking excess alcohol
    • Environmental toxins, such as certain poisonous mushrooms and a type of poison that can grow on peanut plants (aflatoxins)
    • Excessive sunlight exposure
    • Genetic problems
    • Obesity
    • Radiation
    • Viruses
    • However, the cause of many cancers remains unknown.


5. Chronic Obstructive Pulmonary Disease (COPD)

Definition: Chronic obstructive pulmonary disease (COPD) … makes it difficult to breathe. There are two main forms of COPD: Chronic bronchitis, which involves a long-term cough with mucus, and Emphysema, which involves destruction of the lungs over time. Most people with COPD have a combination of both conditions.

Cause: Smoking is the leading cause of COPD. The more a person smokes, the more likely that person will develop COPD.


6. Osteoarthritis

Definition: Osteoarthritis is a normal result of aging. It is also caused by 'wear and tear' on a joint.

Causes: The symptoms of OA usually appear in middle age. Almost everyone has some symptoms by age 70. Before age 55, OA occurs equally in men and women. After age 55, it is more common in women. Other factors can also lead to OA.

    • OA tends to run in families.
    • Being overweight increases the risk of OA in the hip, knee, ankle, and foot joints because extra weight causes more wear and tear.
    • Fractures or other joint injuries can lead to OA later in life. This includes injuries to the cartilage and ligaments in your joints.
    • Jobs that involve kneeling or squatting for more than an hour a day put you at the highest risk. Jobs that involve lifting, climbing stairs, or walking also put you at risk.
    • Playing sports that involve direct impact on the joint (such as football), twisting (such as basketball or soccer), or throwing also increase the risk of arthritis.


7. Diabetes

Definition: Diabetes is usually a lifelong (chronic) disease in which there are high levels of sugar in the blood.

Causes and Risk Factors

    • Type 1 diabetes can occur at any age, but it is most often diagnosed in children, teens, or young adults. In this disease, the body makes little or no insulin. Daily injections of insulin are needed. The exact cause is unknown.
    • Type 2 diabetes is the most common form of diabetes... Type 2 diabetes usually occurs slowly over time. Most people with the disease are overweight when they are diagnosed. Increased fat makes it harder for your body to use insulin the correct way. Type 2 diabetes can also develop in people who are thin. This is more common in the elderly. Family history and genes play a large role in type 2 diabetes. Low activity level, poor diet, and excess body weight around the waist increase your risk.
    • Gestational DiabetesGestational diabetes is high blood sugar (diabetes) that starts or is first diagnosed during pregnancy. You are at greater risk for gestational diabetes if you:
      • Are older than 25 when you are pregnant
      • Have a family history of diabetes
      • Gave birth to a baby that weighed more than 9 pounds or had a birth defect
      • Have high blood pressure
      • Have too much amniotic fluid
      • Have had an unexplained miscarriage or stillbirth
      • Were overweight before your pregnancy


8. Hypertension

Definition: Hypertension is the term used to describe high blood pressure.

Causes and Risk Factors: You have a higher risk of high blood pressure if you:

    • Are African American
    • Are obese
    • Are often stressed or anxious
    • Drink too much alcohol (more than one drink per day for women and more than two drinks per day for men)
    • Eat too much salt in your diet
    • Have a family history of high blood pressure
    • Have diabetes
    • Smoke


10. Hyperlipidemia

(Lipid disorders; Hyperlipoproteinemia; Hyperlipidemia; Dyslipidemia; Hypercholesterolemia)

Definition: High blood cholesterol levels

Cause and Risk Factors:

    • For many people, abnormal cholesterol levels are partly due to an unhealthy lifestyle -- most commonly, eating a diet that is high in fat.
    • Other lifestyle factors are:
      • Being overweight
      • Heavy alcohol use
      • Lack of exercise and leading an inactive lifestyle
    • Certain health conditions can also lead to high cholesterol, including:
      • Diabetes
      • Underactive thyroid gland
      • Polycystic ovary syndrome
      • Kidney disease
      • Pregnancy and other conditions that increase levels of female hormones
    • Medicines such as certain birth control pills, diuretics (water pills), beta-blockers, and some medicines used to treat depression may also raise cholesterol levels.
    • Several disorders that are passed down through families lead to abnormal cholesterol and triglyceride levels.
    • Smoking does not cause higher cholesterol levels, but it can reduce your HDL ("good") cholesterol

So at least seven of the top ten medical conditions that account for the majority of healthcare spending can be at least partially prevented and/or mitigated by factors under the control of individuals, namely, weight control, eating habits, drinking (alcohol) habits, activity levels, and smoking status.

The three remaining of the top 10 medical conditions with regard to healthcare expenditures are 2. Trauma, 4. Mental Disorders, and 9. Back Problems. All three of these conditions also contain elements that can be prevented or mitigated by factors under the control of individuals.


Addressing the High Costs of Healthcare

Berk and Monheit indicate past efforts to reduce healthcare spending (e.g., managed care) have been relatively futile, since they attempt to decrease the costs of care for low-cost healthcare users. To effectively reduce spending, however, efforts should instead focus on high-cost healthcare users, but this has not been done.

The results of our study clearly suggested that cost containment efforts were more likely to be effective to the extent that they focused on the very ill. Over the past decade, however, policymakers have clearly focused on strategies that would affect the care received by a larger percentage of the population. These include incentives to reduce the number of tests ordered by physicians and the length of hospital stays, to increase the use of generic drugs, and to encourage large numbers of people to use services more prudently. Relatively little focus has centered on those with high-cost illnesses.

In “The Unsustainable Cost of Health Care,” the Social Security Advisory Board makes some recommendations as to how to decrease the costs of healthcare, including

Coordination of Care

Coordination of care is especially important for patients with multiple chronic conditions, because it is not uncommon for them to receive duplicate testing, conflicting treatment advice, and prescriptions that are contraindicated.

However, the CBO notes

Over the past decade, many private health plans and organizations have begun to offer disease management as a model of care for chronically ill patients, in an attempt both to improve the quality of care that enrollees receive and to slow the growth of their health care costs.

Initial results from disease management programs and other efforts indicate the difficulty of reducing the use of care. In certain cases, the health conditions underlying high spending may not be amenable to effective interventions. Moreover, although interventions may improve health outcomes for high-cost beneficiaries, they may lead to increases in the use of medical care.

Wellness Programs

Wellness programs often blend into health insurance programs including health benefits provided to retirees. Health risk assessments that are part of wellness programs identify employees and/or retirees who need preventive care or chronic disease management under the insurance program. Programs to reduce health risks, such as tobacco cessation and weight management, are common and sometimes use financial rewards and consequences to motivate employees...

  • Aligning Financial Incentives to Reward More Effective and Efficient Care

The current payment system has two effects: fostering commercial behavior and presenting barriers to aligning care with values.

Alternative systems include managed competition, payment for outcomes, and making healthcare consumers responsible for a larger portion of the costs of their care.

Most public discussion about how to managing the increasing costs of healthcare tend to focus on increasing the efficiency of the provision of care (managing or coordinating care) or aligning incentives of providers to motivate them to use less care. However, policy discussions seldom (seriously) address the fact that (i) most of the expenses are concentrated among a select group of individuals, or (ii) a significant portion of expenses are associated with factors that patients are able to, but do not, control.

Berk and Monheit note

There is an ongoing debate about our health care priorities and the amount of resources that society should be willing to pay to take care of those who are very ill. Our data support the contention that efforts to reduce health care costs must address issues related to how much care should be made available to those who require intense service use.

I would add to this that efforts to reduce healthcare care must also address issues related to how much society should bear the healthcare costs of medical conditions suffered by people who have the power -- but choose not to use it -- to prevent or mitigate the high costs of their care.

In my next blog entry, I will discuss how changes over time in our society got us to the healthcare state we're in now.  Continue on to Part 3.