What Causes Healthcare Costs to Rise?

It's no surprise to us that healthcare costs are rising - but why do these increases happen? Here are a few things that affect the cost of your healthcare.

Ten years ago, total national spending on health care clocked in at $2.6 trillion. By 2018 —the most recent year data are available—our national health care tab was up to $3.8 trillion. The 38% rise in health care spending during that stretch was more than double the rise in prices in general.

Here are a few factors that may cause healthcare costs to rise:

1. We're being charged more and receiving more care.

A study published in the Journal of the American Medical Association (JAMA) a few years ago dissected the source of the big rise in healthcare spending between 1996-2013. Half of the rise was because of higher prices for care, and an increased “intensity” of use (more tests, more hospitalizations, more specialist consults etc.)

That doesn’t seem to have let up more recently. A report from the non-profit Health Care Cost Institute, crunched data from more than 2.5 billion medical and prescription drug claims between 2014 and 2018. During that five year stretch, it found that spending was up, and three-quarters of the increase in spending was because prices rose, and 21% was because people used more services.

Breaking down the price hikes, the average price for prescription drugs rose more than 25% over the five years, average spending on outpatient services rose 21% and the tab for “professional services” rose 16%.

2. There's more of us.

As the population grows, it stands to reason that our national spending on healthcare would increase. In the JAMA study mentioned previously, a growing population accounted for 23.1% of the increase in healthcare costs.

With more patients, that means more doctors need to be hired, which means more salaries need to be paid. A higher population correlates to a higher healthcare cost - which is why the cost of healthcare can vary from place to place.

3. The majority of the population is older.

In 2000, 9% of the U.S. population was at least 70 years old. It’s inched up to 11% in 2020. And no secret, we tend to use more health care services as we age. In the JAMA report, the average healthcare spending for a 55-year- old was about $8,000 a year. For folks 80 or older, the average cost was $23,000.

In the study, about 12% of the rise in overall spending was attributed to an aging population. That could increase in the coming years as the share of the elderly population grows. The Centers for Disease Control expects people at least 70 years old to account for nearly 16% of the population in 2050.

In the nearer term, Medicare estimates that its spending will increase at a 7.4% annualized rate between 2020-2027, well above the forecasted 4.8% annualized spending increase for people covered by private health insurance, and 5.5% for Medicaid spending.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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