Why Is Health Insurance So Expensive?

Posted on Jun 12, 2010

The answer to this question is complex, but in general terms the high and rising costs of health care are the result of eight key drivers:

1. Medical technology is amazing…but it’s expensive

As new health care technologies prove to be more effective, expect utilization to increase; in turn driving costs up even more. Spending on health care technology accounts for two-thirds of the growth in spending.

2. Inflation and Economics

Inflation affects all aspects of life, health care included. However, medical inflation is dramatically outpacing general inflation. Why? It is simple economics. As demand for health care services increases, so do prices. An example of this problem: in the US we currently have 350,000 primary care doctors.  It is expected that we will need approximately 400,000 primary care physicians to properly care for our aging population by 2020. What will happen to the cost of these physician’s services if we don’t address the supply issue? Costs will continue to outpace general inflation.

In a normal market, given these conditions, the invisible hand would get to work and natural incentives would avail themselves to medical students (i.e. they would make more money because supply/demand equation is out of balance). In reality, there are very few incentives to become a primary care physician right now given the uncertainty of US health care system.  A primary source of this uncertainty is the Patient Protection and Affordable Care Act.  Combine this uncertainty with burdensome regulations, excessive administrative and compliance costs, and virtually unlimited malpractice risks associated with running a primary care practice, and it is no wonder that a doctor-shortage is imminent.

3. Cost Shifting

The government brags about its ability to control costs by pointing to statistics that show how much less services cost under their Medicare program as compared to services covered by private insurers. The fact that Medicare and other government health care programs limit reimbursements (effectively instituting price controls) does not mean that the true costs of this care just disappears.  These costs are simply shifted elsewhere in the system.  Now let’s follow the trail. These unreimbursed costs get shifted to private insurers. Private insurers in turn tap their primary source of capital…their clients (i.e. you!). The lesson here is this – even if the government says that they are not going to raise your taxes to pay for government health care programs; you will, in fact, be paying for these programs in the form of higher insurance premiums.

4. Compliance Costs

Did you know that health care insurers spend over $340 billion every year to comply with government regulations. Approximately half of this cost is spent covering services that government mandates be covered by insurance (regardless of whether you, as the consumer, wants this additional coverage or not). The other half is spent on regulatory and reporting requirements.

5. Our Lifestyle Decisions

Spending on chronic diseases accounts for 75% of all health care spending. One way that we can help reduce these costs is to take better care of ourselves. Obesity, tobacco use, drug abuse, poor nutrition, and physical inactivity are all risk factors that can lead to chronic diseases…and all of these are controllable! If we, as a nation, are to have any chance of controlling the out of control health care inflation, then we need to look in the mirror and start taking personal responsibility for our own health.

6. Excessive Utilization

It is estimated that one third of all procedures performed in the US have questionable benefits and/or are outright inappropriate. The lesson here – more care does not always mean better care.

7. Health Care Fraud and Abuse

Conservative estimates suggest that health care fraud and abuse accounts for over 3% of the overall cost of health care. This amounts to $68 billion per year (or $180 Million per day).

8. Prescription Drug Costs

Here are some interesting facts about prescription drug use in the US:

  • The rate of inflation for prescription is 2.5 times that of the general rate of inflation.
  • Some cancer drugs can cost as much as $100,000 per patient for the course of the treatment.
  • 50% of all adults in the US take at least one prescription drug per day and 7% take at least five drugs per day.
  • Two thirds of patients that enter a physician’s office leave with a prescription.

These eight drivers account for most of the rate of increase in health care spending. You might be thinking to yourself, “but what about all those profits reaped by the health insurance companies? That must be a key driver too!”.  This is a common misconception. In reality, insurance company profits amount to just 3% of your premium investment.  To learn where the rest of your premiums go, check out this article.

Health care costs and health insurance premiums are closely correlated. By understanding the key drivers behind health care inflation, we can start making better decisions personally, and as a nation, in an effort to control these costs and to, hopefully, reduce the rate of premium inflation.

For a free review of you current health insurance options, please call Sage Benefit Advisors at (970) 484-1250.  We are here to serve!

One Comment

  1. Nice article. Now I learned why is the health insurance is so expensive.

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