14.8.2: Cost Control

One of the biggest challenges facing healthcare administration today is the ballooning costs of healthcare. Healthcare expenditure increases have historically outpaced general inflation (Shi & Singh, 2017) up until the Covid-19 pandemic. During the pandemic, healthcare expenditure increased significantly, with a lot of it being emergency funding for public health initiatives such as research and development of testing kids and vaccines. At the same time, the economy was experiencing a decline due to closures, layoffs, and supply chain disruptions. So healthcare expenditures during 2021 were at an all time high of 19.5% of Gross Domestic Product (GDP), but have since returned to pre-pandemic levels as GDP recovered and Covid-19 policies and funding expired. Still, the general trend since the 1980s has been that healthcare costs are growing faster than general inflation, and taking up a larger and larger portion of the total economy (McGough et al., 2023). Healthcare costs incurred by a third-party payer (such as a private insurance company) are often passed on to the funder - the government, employer, or patient via premium hikes or cost-sharing (coinsurance and deductibles).

It is likely that the cause of increasing healthcare costs is the result of multiple factors. First, healthcare in the U.S. functions in an imperfect or “quasi-market”, not an idealized “free-market” of capitalism. The typical patient does not pay directly for their own healthcare, so they are not going to do the same researching of cost and quality that they might for a different purchase (like when buying a car) (Shi & Singh, 2017). As mentioned earlier, medical operations and medicines are also often needed for survival or physical function, and so patients have no option to wait or save up money. On the supply side of this market, doctors have a lot of control over what healthcare services are utilized. The saying “when you’re a hammer, everything looks like a nail” seems to apply to doctors too - in particular for procedures that have more controversy on their efficacy. Health services research has found that the number of procedures can vary by geographic location based on the availability and practices of specific providers - not any variation in demographics or need. This can result in an overuse of healthcare services, and potentially unnecessary procedures (Schneider, 2020). For example, some doctors might immediately recommend a hysterectomy for women experiencing severe endometriosis, and yet this procedure may not be the cure or remove all of the pain - and can have significant consequences for the patient’s life (Mayo Clinic, 2021).

Secondly, the U.S. population is aging, due to the baby boomer generation (those born between 1946 and 1964) who began reaching retirement age in 2011. Along with those in the previous “silent” generation, baby boomers make up over a quarter of the total U.S. population (Korhonen, 2023). While medical technology has increased the average life expectancy for several decades, this also means the potential for more healthcare utilization and an exponential increase in healthcare costs for this generation in the coming years (USC Sol Price School of Public Policy, 2023). Americans also have increasing rates of obesity and obesity-related diseases like diabetes, heart disease, and certain cancers, which may require long-term medication or treatment (CDC, 2022).

Thirdly, technology and culture surrounding healthcare in the U.S. emphasizes getting “the best of the best”, cutting-edge medicine. American culture still emphasizes individualism and capitalism in healthcare, and this ideology resists top-down government control of healthcare costs. Technology can be both costly and cost-saving, as with electronic health records (EHRs) and telehealth. Transitioning to EHRs may be initially costly, but may increase efficiency and reduce human errors (Shi & Singh, 2017). Similarly, telehealth is becoming more popular, particularly post-pandemic. Telehealth visits, particularly for mental health services, show promise at increasing access and removing some disparities in care (Egan et al., 2022). The use of telehealth highlights other needs such as broadband internet access in rural areas, and patient familiarity with the use of technology. Other advances in medical technology may not always be worth the costs they present (Shi & Singh, 2017).

Other potential reasons for increasing costs include: the practice of “defensive medicine” which is the utilization of procedures, diagnostics, or medications in order to avoid potential lawsuits, and fraud or system abuse. Well-meaning doctors may wish to provide their patients with procedures that might be considered lower-risk, such as performing an unnecessary C-section to reduce the risk of injury or legal liability from a vaginal birth (Shi & Singh, 2017). Medicare and Medicaid fraud are also big problems for the system, but don’t typically stem from improper use by beneficiaries. Organized crime and unethical billing practices by doctors and other healthcare providers are commonly the sources of costly fraud schemes (Zamost & Brewer, 2023).

When access to healthcare improves - whether that be through the expansion of government-sponsored health insurance, or the availability of local resources (like the building of a new healthcare facility) - the utilization of healthcare services increases. When people get on a health insurance policy and all of a sudden have access to a doctor, they might go in for check-ups and procedures they had been putting off due to the cost. The availability of a new diagnostic tool, surgical procedure, or medication might influence doctors to utilize it more, and patients to request it more. Yet the more utilization of visits, diagnostics, medicines and procedures occurs, the more healthcare expenditures continue to climb. One oft-cited study done by the Rand Corporation between 1971-1982, compared individuals in a variety of healthcare plans including a free version, and one with high coinsurance (95%) . The results of the study indicated that cost-sharing (with high coinsurance for patients) helped decrease utilization and avoid unnecessary doctor’s visits, but didn’t necessarily decrease health outcomes compared to free insurance plans. However, poor individuals with chronic diseases benefited greatly from free healthcare (Brook et al., 2006). Is it necessarily bad that more access equals more usage of the healthcare system? Does the utilization of healthcare services always reflect a direct need? Does the potential for profits drive the research and development of new and better medical care? The U.S. spends the most on healthcare compared to other wealthy nations, and yet has worse health outcomes in several areas (Peter G. Peterson Foundation, 2023). The discussion around healthcare costs and efficacy in the U.S. is certainly a complicated one.

So what measures are being taken to control costs, and who is taking them? With MCOs, the primary care physicians (aka PCPs, family doctors, internists, etc.) are responsible for “gatekeeping”, or referring patients to a specialist, ordering laboratory or diagnostic tests (such as MRIs or X-rays) - thus preventing patients who don’t need these services from taking up important resources. Health insurance companies have also moved away from fee-for-service models to paying providers with capitation (a fixed amount per patient per month), or with diagnosis-related groups (DRGs - a fixed amount for a specific type of illness or treatment), or with cheaper negotiated fees within networks. All of these changes in payment systems attempt to control costs and incentivize providers to provide both economical and effective care. Other methods include focusing on performance - using quality assessments and peer review to advise reimbursements or fee negotiations. Employers may also decide to increase cost-sharing with patients in order to deter them from overutilizing healthcare for unnecessary ailments. (Shi & Singh, 2017).

One of the areas that contributes to high expenditures in the U.S. but not in other countries is healthcare administration (Peter G. Peterson Foundation, 2023). It can be argued that this is mostly due to the complicated system of funding, paying, and providing healthcare, as well as the for-profit, capitalist model. Other OECD countries have different systems of providing healthcare that cost less to administer, including nationalized health insurance (as in Canada), nationalized health systems (as in the U.K.), and socialized health insurance (as in Germany) (Shi & Singh, 2017). This is also evidenced by the lower administrative costs incurred by traditional Medicare, vs Medicare Advantage plans (Part C) which are contracted out to insurance companies to administer via HMOs and PPOs. As more baby boomers are eligible for Medicare, and as Medicare Advantage plans are becoming more popular, these administrative costs are going up (Cubanski & Neuman, 2023).