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Rising U.S. Healthcare Costs: Time to Address the Root Causes

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The challenge of rising healthcare costs in the U.S. has been obvious for decades. Or has it? Various interventions have been attempted, but health costs as a percentage of GDP are forecast to continue to climb. National U.S. healthcare expenditure as a percentage of GDP has risen from 17.2% in 2011 to 17.9% in 2017.

In February 2018, the U.S. CMS Office of the Actuary estimated that “growth in national health spending is projected to be faster than projected growth in GDP by 1.0 percentage point over 2017-2026. As a result, the report projects the health share of GDP to rise from 17.9 percent in 2016 to 19.7 percent by 2026.” GDP growth over the last two periods has kept pace with rising healthcare costs over the last two years, but when GDP growth subsides, the healthcare cost challenge will reemerge. The current stalemate at the U.S. federal level about the path forward for healthcare reflects a lack of consensus about root causes and, therefore, advisable policy.

The sector has already undergone major restructuring and intervention, both government and private sector initiatives. This includes:

  • The American Recovery and Reinvestment Act of 2009 (ARRA) incentivized adoption of EHRs – the assumption was that a lack of electronic clinical records technology was a primary component of inefficiency and waste. 90%+ of U.S. hospitals have now adopted EHR technology
  • The Accountable Care Act (ACA) of 2010 realigned much of American healthcare reimbursement and delivery – the assumption was that decentralized, misaligned organizations created waste and reduced quality. The ACA introduced a raft of initiatives designed to address waste and improve productivity, particularly clinical labor productivity. The results of most of these measures, including the ACA’s Accountable Care Organization initiatives (ACOs) remain inconclusive
  • Consolidation: the payer and provider markets have been roiled by restructuring and consolidation. There were 1,412 hospital mergers between 1998 and 2015; physicians also have consolidated into increasingly larger groups. Moreover, the four largest insurers now account for 83 % of the total national market.” [1].

The largest target for improvement in healthcare delivery costs remains the cost of labor. But does more “technology” improve labor productivity? Not necessarily. Technology can drive rather than retard growth in healthcare costs. According to a Health Affairs (HA) article, “technological changes in the [physician and nursing] sector to date have favored, rather than substituted for, those with high skills" [2]. It depends on the type of work or process, on the technology use case, and on the organizational aptitude for adopting new solutions. Administration, management and IT are oft-cited as a source of burgeoning healthcare delivery costs, but these classes of labor may actually be seen as examples to be followed. Over the 15-year period of the HA study, compensation (change in employment x change in earnings) for administration, management and IT rose only 35.3%. Over the same period, compensation for physicians and nurses rose 80.5%.

Taking a step back, have all the industry-level efforts at restructuring mentioned above missed the mark? Have we simply failed to appreciate how unhealthy Americans have become – and therefore overlooked the root cause of precipitous cost increases? The debates and struggles regarding GDP growth, healthcare delivery cost growth, technology adoption, government intervention, and market restructuring may simply be addressing symptoms rather than causes of the rise in U.S. healthcare costs.

The “hidden in plain sight” fact may be that Americans have unhealthy habits which have national ramifications for healthcare costs. In one 2013 study, only 2.7% of the U.S. adult population could be identified with healthy metrics for exercise, diet, smoking, and body fat. As national healthcare expenditures rise towards 20% of GDP, perhaps we should ask whether the challenge of rising healthcare costs can be adequately addressed by industry-level restructuring efforts. Perhaps this challenge can better be addressed by bottom-up rather than top-down initiatives.


[1] The Commonwealth Fund, Insurer Market Power Lowers Prices in Numerous Concentrated Provider Markets, September 6, 2017

[2] Where the Money Goes: The Evolving Expenses of the US Healthcare System, Health Affairs, July 2016


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