Health-Care Economics and the Impact of Aging on Rising Health-Care Costs




© Springer International Publishing AG 2017
Fred A. Luchette and Jay A. Yelon (eds.)Geriatric Trauma and Critical Carehttps://doi.org/10.1007/978-3-319-48687-1_11


11. Health-Care Economics and the Impact of Aging on Rising Health-Care Costs



Preston B. Rich  and Noran Barry1


(1)
Department of Surgery, Division of Acute Care Surgery, University of North Carolina School of Medicine, 4008 Burnett-Womack Clinical Sciences Bldg, Chapel Hill, NC 27599-7228, USA

 



 

Preston B. Rich



Keywords
Health-careEconomicsAffordable Care ActHealth-care insurancePricingHealth-care costMedicareMedicaidHealth-care spendingGDPHealth care



Trends in US Health-Care Spending


With a gross domestic product (GDP) of $17.9 trillion, the US economy is the largest in the world, representing 22 % of all global economic activity. Currently, US health-care costs represent a larger percentage of this GDP than any other developed nation in the Organisation for Economic Co-operation and Development (OECD) and result in the highest national per capita spending ($9,523) in the world [1]. Historically, US health-care expenditures have progressively outpaced growth in real income and have consistently exceeded GDP expansion by an average of 2.5 % since 1975 [2] (CMS), [3]. US health-care spending has grown from $27.1 billion (5.3 % of GDP) in the pre-Medicare era of 1960 to $3.0 trillion in 2014 (17.5 % of GDP) [1, 6, 7]. Over the same period, the percentage of health-care costs paid for by the US government (federal and state) has progressively increased such that public sources now account for nearly 50 % of all payments [3].

Looking forward, economists project that health-care costs will continue to increase at a rate of 4–7 % per annum (forecasts are highly dependent on public policy and legislative action), a rate that if unabated will expand health-care spending as a percentage of GDP to 30 % by 2035 and will eventually exceed 50 % of all US economic transactions in aggregate by 2080. Federal financing of health care is already facing profound shortfalls, with Medicare Part A payments currently exceeding committed payroll tax revenue. If Medicare costs continue to grow at contemporary rates, the trust fund assets will be depleted by 2029. Given simple economics, it is evident that the rising costs of health care may represent the single greatest threat to the economic security of the US population.


Key Drivers of Health-Care Spending


There is growing consensus that the disproportionate rise in health-care costs is unsustainable and must be controlled given realistic expectations for associated growth in GDP. While the major factors that contribute to cost acceleration can be reasonably well identified and agreed upon, there is more controversy regarding the relative magnitude and economic importance of the various components. The aging of the baby boomer generation is commonly thought to be a major driving force for the increase in overall health-care expenditures. However, despite the increasing proportion of the elderly and the higher per capita spending incurred by this group, most economists attribute only about 3 % of the cumulative increase in health-care spending to this one driver [CBO 2008].

Health care as a commodity is effectively a surrogate for the underlying associated values, which are the quality of health itself and the desire to maximize both individual and collective welfare. There is little doubt that in many cases, health-care spending and resource allocation can be directly translated into the development of productive technological developments, the prolongation of life, the relief of suffering, and a measurable improvement in the quality of health. However, cost, quality, and well-being are not always directly related. From the perspective of economic efficiency and the appropriate allocation of scare resources, this nonlinear relationship necessitates the distribution of our scarce resources within the broader context of efficacy, cost-effectiveness, comparative analysis, and efficiency.


Insurance

Although health insurance was initially conceived as a mechanism to reduce the financial impact of catastrophic illness, its role has expanded in attempts to make all types of health care financially accessible and available to the population. As health-care costs have continued to rise, the amount of out-of-pocket expenses paid by the end user has almost inversely decreased [KFF March 09]. Although causality in this relationship is difficult to directly establish, a classic experiment conducted by the RAND Corporation from 1974 to 1982 provided strong evidence that reductions in coinsurance lead to more people using health services and more services used per person [8]. On the other hand, cost sharing reduced the use of both inappropriate and appropriate medical services. Whereas this effect had minimal consequences on the health status of the majority of people enrolled in the study, for those who were poor and suffered chronic illnesses, the reduction in health utilization was harmful. The CBO concluded that between 5 and 20 % of the increase in health costs can be attributed to the progressive expansion of more extensive health-care coverage. One economist estimates that the insurance expansion represented by the institution of Medicare in 1965 may explain nearly half of the increase in health-care spending that occurred between 1950 and 1990 [9, 2].


The Patient Protection and Affordable Care Act

Enacted in 2010, the Affordable Care Act (ACA) sought to increase the quality and affordability of health insurance and reduce the number of uninsured or underinsured Americans, while ultimately reducing health-care expenditures for both individuals and the federal government. Several economically significant provisions of the ACA were implemented in 2014, including an extensive federally funded expansion of the Medicaid program along with concomitant development of private health insurance products through the implementation of health insurance marketplaces, premium tax credits, and cost-sharing subsidies (Truffer, OMB).

Increased access to health care provided by the various components of the ACA resulted in 8.7 million less uninsured individuals in the USA (a 19.5 % decline) and the highest health-care-insured US population rate since 1987 (88.8 % in 2014) (MSIS, CMS). Simultaneously, programmatic expansion also accelerated national health-care-associated spending across the spectrum of payers (per annum 2014: private insurance 4.4 %, Medicaid 11 %, Medicare 5.5 %), increasing aggregate annual US health-care expenditures by 5.3 % in 2014 and continuing to exceed post-recession GDP growth by 1.2 %. US health-care spending increases associated with the ACA were widely distributed across various cost levers including retail prescription drugs (12.2 %), hospital care and related services (4.1 %), and physician and clinical services (4.6 %) (IMS).


Technology

As the USA has transitioned from its manufacturing-based industrial revolution to an economy that is 80 % service oriented, Americans have grown accustomed to rapid disruptive innovation and the development of advanced technological breakthroughs that fundamentally alter the structure and function of markets. In no sector is this phenomenon more evident than in health care. The development of new drugs, devices, services, procedures, and applications not only impacts current treatment paradigms but in many cases also expands possible treatments to new populations. Technological advances often outpace our ability to adequately study their effectiveness, and evidence-based strategies designed to rationally apply them are often replaced by their rapid and unsystematic adoption with unpredictable incorporation into medical practice.

Although the potential exists for innovative technological advancements to decrease the cost of health care by reducing hospitalization or avoiding associated morbidity, most experts agree that the majority of medical technological developments significantly increase the costs of health care [4]. Even when cost reductions are possible, technology expansion and application into broader populations has the net effect of increasing spending. While measuring the direct financial impact of technology can be difficult, the cost contribution of technology on health-care spending can be estimated as the cost residual that remains after accounting for more readily measurable drivers. Using this methodology, the Congressional Budget Office (CBO) estimates that approximately 50 % of the growth in US health-care costs can be attributed to technology, making it the single greatest contributor to health spending [CBO 2010, Newhouse]. It is reasonable to predict that desirable technologies will continue to be developed in the future, perhaps at an even greater pace, further complicating our decisions regarding allocation of our limited resources [2].


Other Costs

As medical care and its financial components become more complex, so must the infrastructure that sustains it. While the administrative costs required to deliver health care can be difficult to accurately capture and gauge comprehensively, few would argue that the associated expenditures are rising. Historical estimates attribute 3–10 % of rising costs simply to increases in administrative and support functions in the sector. The CBO found that administrative costs have escalated from approximately 7 % year between 1995 and 2005 to nearly 13.8 % in 2013 as a result of ACA-associated increased enrollment in Medicare and Medicaid [10].

The role of medical malpractice liability on escalating health costs relates both to the measurable impact of rising insurance costs paid by providers and the less quantifiable but arguably more significant contribution of increased costs related to the practice of “defensive medicine.” Because malpractice premiums constitute only 1–2 % of US health-care expenditures, the projected 6 % direct reduction in premiums that would likely result from tort reform would be expected to have only a modest impact on total expenditures [15]. This larger potential issue is also the most controversial – the notion that health-care costs are driven dramatically higher by medical practice that may overutilize medical resources solely to reduce the chance of litigation. Several studies designed to address this issue have provided disparate results, and the relationship between malpractice liabilities and global health-care costs remains in large part unanswered [2].

Because health and wellness are desired states of being, health care as their market-based surrogate is also a desired service. As personal income rises, one’s ability to pay for a variety of health-care services increases. Health care is a normal good, such that aggregate demand for it increases as income increases. Furthermore, because there are few substitutes available to replace it, health care exhibits significant price elasticity of its demand function. Consumers are fairly price insensitive, and this effect is further magnified by the relative disengagement of payment and services that occurs from the interposition of third-party intermediaries. A high per capita income in the USA is often cited as one of the key factors that contribute to our comparatively high health-care costs. The true magnitude of this effect is a matter of debate, but economists have estimated the elasticity of US health care at approximately 0.2, meaning that for every 10 % increase in real income, associated health expenditures can be anticipated to rise approximately 2 % [Liu Chollet, CBO 2008].


Chronic Disease and Disability

In the USA, health-care resources are not distributed equally among the population. To the contrary, the sickest 5 % of the US population accounted for nearly half of all health spending in 2008 and 2009, and just 30 % of the population account for nearly 90 % of aggregate US health expenditures. The elderly are disproportionately represented among this top decile of spenders, comprising 13.2 % of the population but 42.9 % of the heaviest consumers. Not surprisingly, chronic diseases are more prevalent in the older population, and their presence increases and maintains the elevated costs of health care in this portion of the population [17].

Chronic diseases, which affect older adults disproportionately, are the leading cause of death and disability in the USA, and modifiable conditions such as obesity and smoking are the most significant contributors [18]. In aggregate, the treatment of chronic diseases accounts fully for 75 % of US health-care costs [20, 19]. In the USA, approximately 80 % of individuals over age 65 have at least one chronic condition, and 50 % have at least two [19]. The ten most prevalent chronic disease diagnoses account for nearly one-third of national hospital charges. Of these, the Agency for Healthcare Research and Quality (AHRQ) identified five as sources of potentially preventable hospitalizations given exposure to appropriate health modification strategies and preventive health measures (coronary artery disease, congestive heart failure, diabetes, chronic obstructive pulmonary disease, and asthma). The economic costs of chronic disease are cumulative; treating patients with one chronic condition (25 % of the US population) costs twice as much as treating those without chronic disease. Treating patients who suffer from multiple comorbid conditions costs up to seven times as much as does treating patients burdened by only one chronic condition [18, 20].

In addition to the increasing incidence of chronic disease, the aging process is associated with increasing disability secondary to sarcopenia or progressive loss of muscle mass. Approximately 45 % of Americans over age 65 are sarcopenic, with approximately 20 % of the US population being functionally disabled [21]. When the prevalence of disability and the estimated increased cost for each individual are multiplied by the increasing number of older Americans, the economic burden of sarcopenia alone is estimated at $18.5 billion [21].

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Nov 10, 2017 | Posted by in Uncategorized | Comments Off on Health-Care Economics and the Impact of Aging on Rising Health-Care Costs

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