For purposes of this analysis, we exclude changes in premiums associated with better coverage, since one would need to consider the impacts of the enhanced coverage and correspondingly lower out-of-pocket spending to be able to gauge the impact of the changes accurately. In addition, health reform might change the risk pool and thus affect the average cost of enrollees. Limiting age-based underwriting without providing offsetting subsidies to young adults would drive many within this population out of the insurance market.
Close-to-universal coverage, in contrast, might bring more young people into the market, thus lowering premiums. Because of the issues associated with changes in out-of-pocket spending when people move in and out of coverage, this effect is, again, omitted. We estimate the impact of insurance exchanges and system reform on average premiums using a method analogous to the one proposed above. In particular, we consider how reductions in administrative loads and more-efficient care delivery will affect average market premiums.
The basis for the premium estimates is the average employer premium in , as determined by the Medical Expenditure Panel Survey. This premium is then trended forward using the projected growth of premiums under the different scenarios. Exhibit 6 shows the premium estimates.
Relative to this increase, premiums under reform increase only three-quarters as much. The estimated health system savings we present are larger than those forecast by the Congressional Budget Office and the Centers for Medicare and Medicaid Services Office of the Actuary, which are similar to each other. The common assessments of CBO and the CMS actuary are not surprising, since most of the evidence upon which they are based comprises peer-reviewed studies that utilize carefully controlled comparison groups either randomized trials or the natural equivalent.
Within that genre, the dominant published themes are the inexorable nature of technology-led medical care cost increases, and the resulting need for unalterable demand- or supply-side constraints to confront that trend.
Although there is significant evidence in the literature that medical care providers are responsive to financial incentives, there is not much evidence in the published literature on policy reforms short of severe constraints that save large amounts of money. And for every study that shows savings from baseline, there is another study that does not. Thus, the common assessment is that there is little efficacious that can be done. There is, however, a less formal, but no less important, literature that sees the world very differently.
Business scholars, including Michael Porter and Elizabeth Teisberg, and Clay Christenson, Jerome Grossman, and Jason Hwang, all note the enormous inefficiency in health care relative to other industries: excessive administrative spending, wasted time and money, and resources spent not reducing costs but simply passing them along to others. These scholars highlight the enormous potential for productivity improvement that reform can drive if it makes health care operate more like other industries.
Through their experiences, health care practitioners reach a similar conclusion. Physicians on the frontlines of medicine, including Guy Clifton, Arthur Garson, Atul Gawande, and Arnold Relman, see the waste that exists and hold a common view on why it exists—principally, misaligned incentives. They show how health care would be better and cheaper were it not for a health care system that discourages such improvements. Echoing the story of misaligned incentives are journalistic accounts showing how the health system fails patients, physicians, and society as a payer.
Each case cries out for reforms that would change the underlying perverse incentives. A number of case studies lend support for the potential of reform. The experiences of Geisinger Health System, HealthPartners, Denver Health, and other health care delivery organizations demonstrate that health can be improved and costs lowered.
They also point to the components that are most critical for system improvement. While these studies are often published in the professional literature, their authors do not employ the careful comparison groups that would make the results compelling to the most skeptical reviewers. Thus, case study findings are not given as much emphasis as they otherwise might.
While views differ as to appropriate evidence standards, the situation we analyze is one where there are essentially no clinical trials and where effects of multiple large policy changes may differ substantially from the effects of small trials of single interventions.
In such a situation, it is imperative to cast a wider net than traditional evidence standards do. Our decision to be more inclusive in the use of evidence is the primary reason why our results diverge from those of CBO and the CMS Office of the Actuary. The new health reform law introduces a range of payment and delivery system changes likely to result in a significant slowing of health care cost growth. First, the law calls for the creation of health insurance exchanges that offer a choice of plans and the ability, for the first time, to truly compare plan premiums.
The exchanges will have authority to reject plans with excessive premium increases and to set caps on insurance profits and overhead of no more than 15 percent of premiums for large firms and 20 percent of the premiums for small firms and individuals, producing savings to employers and workers that might reach 15 percent to 20 percent by The law also begins to change how providers are paid and care is delivered, so that they are rewarded not for the volume of services they provide but for the value they offer.
It accelerates the testing, adoption, and spread of innovative payment methods to control growth in volume of services. The law also includes extensive provisions to report data on quality and cost and to enhance choice. Finally, the law directs investments in primary and preventive care, among other changes, that have the potential to yield substantial savings.
In addition to significant payment and delivery system reform, the Affordable Care Act will extend coverage to an estimated 32 million previously uninsured Americans by Improving access to care should return substantial improvement in overall population health, increase workforce productivity, and reduce the significant financial risk uninsured and underinsured individuals and families now face in the unreformed market.
The annual growth rate in national health expenditures will be slowed from 6. Congress and the President have enacted a historic health care reform law that will help ensure that all families are able to get the care they need, as well as financial security and relief from rising premiums. The legislation is a significant first step toward bending the health care cost curve for the federal government and families, and it will yield real economic benefits. Thomas Waldrop , Emily Gee.
Charles Gaba , Emily Gee. This widespread dissatisfaction with health care costs is completely rational; the cost of American health care is exceptionally expensive while its quality is subpar when compared with health care in similarly rich nations. The ACA expanded coverage to millions and established clear and popular rules to eliminate bias against preexisting conditions.
Its provisions provided much better protection against personal bankruptcy due to medical costs. Worse, since the ACA was passed, the Republican-controlled Congress has done nothing to usefully reform or strengthen the ACA but has instead sought to subvert its gains.
On the cusp of the election, this has left the American health care system in limbo. The GOP has undermined the already insufficient reforms of the ACA without offering any alternative plan to provide health security. Doing nothing but undermining an already-troubled American health system should not be a serious policy option. While a single-payer system has large potential benefits, moving toward such a system will almost certainly be a long process that promises little short-run relief for families.
Luckily, however, many of the key policy virtues that allow more robust public systems like Medicare or the health systems of peer countries to achieve greater cost containment without sacrificing quality can be realized much more quickly and with potentially less political opposition. These cost-containment strategies would not only make a large public role for health care more plausible, they would also supply needed short-run relief to the private American health care system, particularly the system of employer-provided health care.
This ESI system, which provides coverage for American families through the workplace and is paid for with contributions from both employers and employees, is by far the single largest source of health insurance coverage in the United States today. In the decade before the Affordable Care Act was passed, the ESI system was clearly burdened with the most pressing problem facing the overall American health insurance system: rapidly rising costs. These rising costs in turn led to the rapid erosion of ESI coverage, even during the economic expansion of the early and mids.
The lesson here is clear: controlling health care costs is vital to the economic well-being of the majority of Americans. This report highlights trends in health care costs in both ESI and the overall American health system.
It demonstrates the various channels through which rising health care costs put downward pressure on the growth of living standards of American families, and it identifies the key sources of rising health costs. Finally, it provides a series of recommendations for policymakers looking to pass reforms to slow the rate of health care cost growth, identifying, in particular, broad approaches that do and do not have merit.
These findings underscore the depth of the challenges that remain to making our health care system more equitable and efficient. They also provide a clear series of steps that policymakers can take to improve this situation. These steps can be part of the groundwork for a more fundamental transformation of the American health system but would also ensure that the current pillar of this system—ESI—will remain strong as new reforms are made.
Table 1 shows one of the most salient trends in American economic life over recent decades—the rising cost of premiums for ESI. It shows employee contributions for these premiums, as well as their total cost, for both family and individual plans. The top panel of Figure A visually depicts the dramatic rise in health care costs as a share of income. This 7. This relatively rapid growth of ESI single premium costs led to employee payments for ESI single premiums rising from 1.
While increased costs of employee contributions to ESI premiums are one of the most salient ways that rising health costs can put pressure on living standards, most economists would agree that in the long run even rising employer contributions to ESI premiums harm potential wage growth.
If workers would rather have more compensation in the form of health insurance contributions and less in cash, employers should in theory be happy to oblige this. This reasoning is why we also show the share of total ESI premiums both employee and employer contributions in Table 1 as well.
These total premiums have grown slightly slower than just the employee contributions, but still rapidly enough to increase their share of average earnings of the bottom 90 percent in every year. Looking at the change in ESI premiums as a share of annual earnings gives a potentially more realistic description of what the boost in earnings could be had premium price inflation not run ahead of wage growth.
Had single ESI premiums simply stayed constant as a share of average earnings, the table shows that this would imply a boost to annual pay of 8. Given that nominal annual earnings rose by If these rising ESI premiums were purchasing more insulation against health care costs for workers, then perhaps their rapid rise in recent years would have stung less.
In other words, if workers were paying less out of pocket when they go to the doctor, then the higher premiums might seem like a good deal. Between and , total health costs cumulatively rose by Out-of-pocket costs actually rose slightly faster in this period, at This indicates clearly that the rapid growth in ESI premiums paid in this time did not translate into enhanced coverage of total health costs i. Figure A Workers' health insurance premiums are rising much faster than wages but not lowering out-of-pocket costs Average annual earnings of the bottom 90 percent and premiums for employer-sponsored health insurance, — Cumulative growth in total health care costs for workers covered by employer-sponsored insurance, costs paid by insurers, and costs paid out of pocket by covered households, — Notes: In the bottom panel, costs paid out of pocket by employees include deductibles, copayments, and coinsurance but do not include employee contributions toward premiums.
If insurers were compensating for rising premiums by providing more comprehensive coverage, their costs paid would be rising at a faster rate, but the closeness of the lines in the graph shows that the share of medical bills paid for by insurers has not increased. In short, rising ESI premiums seem to be paying for essentially the same level of protection against health cost shocks as they ever did, with the overall cost of health shocks increasing over time.
This implies that the real driver behind ESI premium growth is underlying health costs—an implication that is confirmed in the next section of this report. Finally, besides their potential role in stifling wage growth, the rapidly rising costs of ESI premiums surely played a role in the rapid erosion of ESI coverage over much of this period.
Gould a documents the erosion in the share of Americans covered by ESI in most of the period between and As described in the next section, we define ECG as the difference between the per capita growth rate of potential GDP and the per capita growth rate of health costs. After , the pace of this excess cost growth relented at least temporarily , and coverage declines were driven largely by the labor market crisis of the Great Recession. In recent years, ESI coverage has largely stabilized in a post-recession environment, with relatively moderate excess health care cost growth.
Given that rising ESI premiums seem to not be paying for more comprehensive coverage, and seem instead to simply be paying for constant protection against steadily rising health costs, it seems likely that trends in premium growth are being driven by overall health costs. The simplest test of the hypothesis that rising health costs are not unique to ESI coverage can be found in Figure B. This figure shows annual growth rates of per capita potential gross domestic product GDP and per capita growth rates of health costs, and it also charts the growth in national health spending as a share of potential GDP over time.
GDP is essentially a measure of total domestic income, and potential GDP is a measure of what GDP could be in a given year assuming the economy did not suffer from excess unemployment during that year. Because we are interested in growth rates of health care costs, and because these growth rates are influenced by price changes, neither of these series are adjusted for inflation; instead, we simply track nominal growth in both measures.
Potential GDP is used to measure excess health care cost growth so that it is not infected by economic recessions and booms. As the chart shows, the per person annual rate of health care cost growth is substantially faster than annual growth in potential GDP per person over the entire period, by an average of 2. This more rapid growth of health care costs implies that these costs have been rising over time as a share of total U. The figure also charts this evolution, indicating that health care spending has risen from 5.
GDP in to 8. Figure C also shows the average annual excess cost growth of health care for the period from to , just before the Great Recession, and for the period since the period during and after the Great Recession.
In addition to per capita rates for the entire U. Figure C highlights that excess cost growth was quite steady for both of these populations until roughly a decade ago, when it fell substantially. Notes: Excess growth in health care costs is the difference between the growth rate of potential GDP per capita and the growth rate of health spending per capita health costs divided by the entire population and health spending per insurance enrollee health care costs divided by the number of persons with health insurance.
Data on the share of the population with access to health coverage before come from Cohen et al. Figure C also shows that between and , excess costs were slightly higher when calculated with health care costs divided by the share of the insured population rather than the entire population. Unlike nearly every other advanced economy, the United States has allowed a large share of its population to go without access to health insurance each year for decades.
Because lack of insurance can make seeking medical care prohibitive on the grounds of cost, this failure to provide universal access to insurance may well have slightly held costs down at the national level. Figure C also highlights that the relative success in containing costs post is even more dramatic once one accounts for the large increase in the share of population covered in that time; excess cost growth calculated using a measure of cost per insured is far slower post Finally, it is worth emphasizing that—as has been documented extensively—the fast pace of health spending growth has not bought high health care quality for the United States relative to other advanced economies.
In international comparisons, American health outcomes are decidedly below average when compared with these rich country peers.
Finally, the U. The scores in Figure D are normalized so that the weakest performance measured for each criterion is equal to 1. Notes: Because the different performance evaluations drew on different data sources and thus were not based on a common indexing scale, each measure was first transformed to make the worst-performing measure equal to 1.
Then this normalized index was re-sorted to make the U. This process allows us to show how far the U. Rising health care costs crowd out household resources that could be spent on other things. In the first section of this report, we highlight one potential channel through which rising health costs could pressure living standards: crowding out potential growth in cash wages as employers put more money into compensation in the form of health insurance premiums for ESI coverage.
Finally, even though the U. Figure E tracks the role of various financers of health care spending in the United States over time. The most striking finding is that public sources of payment have grown the fastest by far; by , public sources accounted for more than half of all spending. Publicly provided health insurance is funded through a mix of taxes both general revenue and dedicated revenue sources , user premiums, and increased debt.
In , these dedicated revenue sources raised just under 2 percent of GDP TPC , leaving almost 5 percent of GDP spent on public insurance programs to be financed by a contribution of general federal government revenue, state revenues for their contributions to Medicaid , and debt.
In the remainder of this section, we document how each of these direct channels that finance health care spending can lead to pressure on growth in non-health-related spending, and we provide an empirical assessment of how large this pressure might be. Figure F shows a sharp long-run decline in the share of total health costs paid out of pocket by households since However, this decline has done essentially nothing to relieve the pressure that out-of-pocket OOP costs puts on household incomes: Figure F also shows the share of household income for the bottom 90 percent of households that went to paying medical OOP costs for each year from to Since , OOP costs have fallen from nearly 46 percent to roughly 11 percent of total health spending, yet the share of household income for the bottom 90 percent that must go to OOP costs has not really budged since —averaging roughly 4 percent of income in the years since then.
Notes: Exact data are unavailable for years prior to , so we assumed that household incomes rose at the same rate as per capita personal income from BEA , NIPA Table 2. For OOP costs as a share of income for the bottom 90 percent of households, we allocate 90 percent of total out-of-pocket costs to the bottom 90 percent of households in each year. Sources: Data on out-of-pocket costs and overall costs come from CMS Data on total income for the bottom 90 percent of households come from CBO a.
Figure G shows employer contributions to ESI premiums as a share of total labor compensation and as a share of compensation for the bottom 90 percent since , using data from the National Income and Product Accounts NIPA of the Bureau of Economic Analysis as well as data on comprehensive household incomes from the Congressional Budget Office.
Data for examining the bottom 90 percent are only readily available since Between and , employer contributions as a share of compensation rose by 3. Data for bottom 90 percent are constructed using shares of total compensation and employer ESI contributions from Congressional Budget Office b. Appendix B gives some texture to this aggregate analysis by examining the potential crowd-out of cash wages by rising ESI premiums across wage fifths.
The rise in spending on public health coverage stems from rising per-enrollee costs of this coverage combined with an increase in the population covered by public insurance. CBO measures take into account demographic changes within the public programs that may have influenced costs.
Figure H charts actual federal spending on health costs versus what federal spending would have been in had there been no excess costs in health programs since The figure shows that public spending as a share of GDP in would have been 1. Notes: We use potential GDP in our calculations. As discussed above, by , excess health care cost growth had already caused the employer-provided premium share of total compensation to rise by 3.
But this past performance may understate potential future pressures from health care cost growth. The 30 to 40 years ending in that saw pervasive excess health care growth saw these costs start from a much more modest base. Figure I highlights the outcome of such a forecast, showing employer contributions to ESI premiums and spending on public insurance programs as a share of total GDP in two scenarios.
In the first scenario, excess cost growth follows the path forecast by the CBO long-term budget outlook for public programs. In the second scenario, there is no excess cost growth in either public or private health costs. Under the current projections path, spending on public programs and by employers on ESI premiums reaches The 2. Crucially, between and , a significant portion of the projected rise in public spending is attributable to the baby boom generation aging fully into Medicare eligibility.
For projections of employer contributions to ESI premiums, we use the data from Figure G and then project that the ratio of earnings to total compensation will be reduced by rising health care costs at the rate forecast by the Social Security Administration SSA The rise in health spending as a share of GDP shown in Figure B could in theory stem from either of two influences: a rising volume of health goods and services being consumed increased utilization or an increase in the relative price of health care goods and services.
Figure J provides evidence suggesting which of these is the prime driver. It shows clearly that health care has risen much more slowly as a share of GDP when adjusted for prices, rising 2. The figure also shows that since , prices for health-care-related goods and services rose more than twice as much as economywide prices.
Sources: Data on health spending from CMS This finding is important for policymakers to absorb as they attempt to find ways to rein in the rise of health costs in coming years. International comparisons highlighted in the next section provide even more reason to think that the primary problem with American health care costs is prices instead of utilization.
Some researchers have made the claim that quality improvements in American health care in recent decades have led to an overstatement of the pure price increase of this health care in official statistics like those in Figure J.
But even if official price indexes understate the increase in health care quality made available to U. A look at the U. The first finding that leaps out from this international comparison is that the United States spends more on health care than other countries—a lot more. Table 2 shows the share of health care spending in normalized by overall GDP for a group of 21 advanced country peers. The It is almost 80 percent higher than the group average of 9. Table 2 also shows the average annual percentage-point change in the health care share of GDP, as well as the average annual percent change in this ratio over time.
A particularly striking finding from this table is that not only did the United States spend more on health care as a share of the overall economy than any of its peers in the first year for which data is available, it has also generally pulled away from these peers in subsequent years. When growth in health spending is measured as the average annual percentage-point change in health spending as a share of GDP using earliest data through , the United States has seen unambiguously faster growth than any other country in recent decades.
When growth in health spending is measured as the average annual percent change in this ratio, the United States has seen faster growth than all other countries except Spain and Korea two countries that are starting from a base period ratio of half or less of the United States. Notes: Data are available beginning in different years for different countries. Examining data on utilization and prices separately shows clearly that it is high prices that drive the U. Figure K shows the utilization of physicians and hospitals in the United States compared with the median, maximum, and minimum utilization of physicians and hospitals among its OECD Organisation for Economic Co-operation and Development peers.
Notes: For physician services, the utilization measure is physician visits normalized by population. For hospital services, the utilization measure is hospital stays determined by discharges normalized by population. As described in Squires , the data represent either or the nearest year available in the data. For the U. The U. While utilization in the United States is typically lower than utilization levels for its industrial peers, prices in the United States are far above average.
The CPR shows the prices of various medical goods and services in the United States compared with prices for the same goods and services in a number of other advanced countries. Price data are not available for all goods and services in all countries e.
Averaged across the non-U. And even when averaged across the non-U. Notably, a number of these goods and services are highly tradeable—particularly pharmaceuticals. The fact that international tradeability has not eroded enormous price differentials between the United States and other countries should be a red flag that something strikingly inefficient is happening in the U.
For all four of these measures, the United States is well below the highest utilization rate. The United States is only the highest-utilization country—by a small margin—when it comes to knee replacements. In short, if one were looking only at the data charting health care utilization, one would have little reason to guess that the United States spends far more than its advanced country peers on health care.
Notes: Utilization measures are normalized by population. Figure N shows another set of international comparisons of health care inputs and prices, from Laugesen and Glied They find that utilization of primary care physicians by patients is higher in all of these countries, by an average of more than 50 percent.
Yet salaries of primary care physicians are higher in the U. The utilization measure they use for orthopedists is hip replacements. Hip replacements normalized by the population are a bit rarer in Canada than the United States, with Canada undertaking 74 hip replacements for every in the United States. They are roughly as common in Australia 94 to and the United Kingdom to , and they are more common in France and Germany. Orthopedist salaries are much higher in the United States than in any peer country—more than twice as high on average.
The data source uses incidence of hip replacements as the comparative utilization measure for orthopedists.
As we have noted, many rightfully argue that most Americans would not want to trade the health care available to them today for what was available in decades past, even as official price data indicate that all that has changed is the price. However, the international evidence indicates clearly that most Americans should be willing to trade the health care available to them today for what is available to the residents of most other advanced economies.
This health care available abroad is far cheaper and yet of at least as high quality. The relatively low level of utilization and very high price levels in the U. This inference is supported with some more specific evidence in Appendix C, which provides indirect estimates of the rise in hospital prices across countries over time. It is clear that the United States is an outlier in international comparisons of health care costs.
It is also clear that the United States is an outlier not because of overuse of health care but because of the high price of its health care. As discussed above, the United States is decidedly unremarkable on health outcome measures see Figure D and is even toward the low end of many crucial health measures.
All of this evidence strongly indicates that getting U. Even though many health researchers have noted that price—not utilization—is the clear source of the dysfunction of the American health system, it is striking how much attention has been paid to reducing utilization, rather than reducing prices, when it comes to making health policy in the United States in recent decades.
In the years leading up to the passage of the ACA, many policymakers cited the Dartmouth Atlas of Health Care and its research spinoffs e. These findings were a great source of temptation for policymakers, and they were incredibly influential in the American policy debate in the run-up to the ACA. The problem is, even if the Dartmouth research was entirely correct, it was always going to be hard to figure out how to operationalize these findings for policy. The most obvious complication was how to construct policy levers to precisely target which third of health care spending was wasteful.
Further, subsequent research in recent years has highlighted additional reasons to think that the Dartmouth findings would be difficult to translate into policy recommendations. The earlier Dartmouth Atlas findings were largely gleaned from looking at regional variation in spending by Medicare.
The Atlas found large regional variations in costs and found that high-cost regions did not seem to produce better health outcomes. The authors of the Atlas hypothesized that regional differences in physician practice drove price differentials that were not correlated with quality improvements.
Policymakers and analysts have often made the argument that if the lower-priced, but equally effective, practices of more efficient regions could be adopted nationwide, then a large chunk of wasteful spending could be squeezed out of the system. However, research by Doyle and Sheiner b indicates that the noncorrelation between spending and outcomes found in the Dartmouth research may well be driven by a failure to fully control for the socieoeconomic and health characteristics of patients.
Further, Cooper et al. This finding casts doubt on the hypothesis that regional variation in practice is driving trends in both spending and quality, as these type of region-specific practices should affect both Medicare and private insurance payments. The evidence reviewed above casts doubt on the potential to rein in health costs on the utilization side.
This excise tax would be levied on employer-provided health benefits above set limits, thus incentivizing employers to offer less expensive health plans, which would in turn translate into higher out-of-pocket costs for workers. In the case of health care, insured consumers pay fixed premiums every month regardless of whether or not they visit a doctor. Once the fixed cost of paying a premium is met, each subsequent visit to a health provider is then partially to fully subsidized by the insurance company, and this means that the patient does not face the full marginal cost of the decision to obtain health care.
Even the most dogmatic proponents of solving moral hazard would not, of course, endorse outlawing insurance as a means of containing costs. Instead, they would argue that most Americans are simply over insured and that more health care spending should be financed out of pocket until those costs become prohibitive, at which point insurance would then properly kick in.
However, this focus on increasing patient cost-sharing is poorly designed for smart cost containment and could do significant harm, for a number of reasons. First, unless one is willing to increase cost sharing even for truly catastrophic medical costs, such measures will miss the primary cost drivers in the U.
Eighty percent of health dollars are spent on just 19 percent of health consumers, and 50 percent of health dollars are spent on just 5 percent—presumably the sickest patients Gould b. However, the plan leaves 6. All current forms of insurance for acute care would be eliminated, including private insurance, Medicaid, and Medicare, and everyone residing in the US would be covered by a new public insurance program.
Health spending by employers would be eliminated, and household and state health spending would decline considerably while federal spending would increase significantly. Coverage and costs: This reform option covers the entire US population. A second single-payer approach can be constructed with lower federal and system-wide costs.
However, the plan leaves all Research Area :. Health and Health Policy. Centers Centers :. Health Policy Center. To reuse content from Urban Institute, visit copyright. Meet The Authors.
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