The Two Health Care Cost Crises

The last Centers for Medicare & Medicaid Services (CMS) report pegged national health spending at $4.5 trillion in 2022, and just over 17% of gross domestic product (GDP). That’s actually lower than in earlier government projections, but now CMS actuaries expect the pace of growth to pick up again. KFF’s 2023 employer survey also showed that premiums rose more sharply last year after several years of modest increases. There have always been peaks and valleys in health care costs despite various efforts to rein them in, and cost growth never stays bottled up for long. My colleague Larry Levitt and I called this “The Sad History of Health Care Cost Containment” in a piece we wrote some time ago.

But the cost of health care isn’t a single problem, it’s a multi-dimensional one. That’s one reason we often talk past each other about health care costs; we’re talking about different problems. There’s national health spending, consumer out-of-pocket costs, federal health spending (mostly for Medicare and Medicaid), state health spending (mostly Medicaid), employer premiums, and the cost problem currently in vogue—getting better “value” for the health care dollar. Like a Venn diagram with sets that don’t always overlap, each of these are different challenges that often have different and sometimes conflicting solutions. We work on all of these dimensions of health care costs at KFF, but two health cost problems stand out as legitimate health policy crises: Affordability, especially for people who are sick and need a lot of health care; and national health spending (the subject of the CMS annual report).

About a quarter (24%) of the American people say they or a family member struggled to pay their medical bills just in the past year. The number rises to 33% for those who are in fair or poor health. Worst off are people who are sick and uninsured: 51% of that group report problems paying their medical bills. A survey we did a few years ago of people with employer coverage found that half of people with a serious health problem such as cancer or asthma or heart disease said that they or a family member had problems paying their premiums, deductibles or copays in the last year, with significant shares increasing credit card debt, or using up most of their savings, or taking an extra job as a result. That’s the heart of the affordability crisis—too many people who are sick can’t pay their medical bills.

Most people don’t use a lot of medical care every year and it makes sense that people who need more medical care run up higher medical bills, but the fact that they can’t pay them is hardly how a functioning and effective health system should work. About 100 million people are also saddled with crippling medical debt, as our big, ongoing KFF Health News investigation “Diagnosis: Debt” showed.

These out-of-pocket costs are what can make health care a real issue for voters, far more than national health spending, which is more of a worry for economists and policymakers. In what to me was a polling surprise, in our most recent Tracking Poll health care “affordability” came in second as a concern for voters, just barely trailing the biggest issue of all—inflation— and came in 16 percentage points ahead of drug costs, an issue which has been much more in the news and at the center of recent health policy debate. We know this only because we put it on the list of choices to see where it ranked; it’s not typically included in polling questions about voter priorities, only the general catchall “health” or “health care” is. That doesn’t tell us much about what voters mean when they select “health” as a priority on polls.

At the same time policy experts and policymakers have rightly been worried about the other great health cost problem—national health spending. CMS actuaries project that health spending will grow on average, 5.4% per year through 2031, outpacing projected average growth in nominal GDP of 4.6% per year and resulting in health spending consuming almost 20% of GDP (19.6%) by 2031. At that point we will collectively be spending $20,425 per capita for health care. All this health spending generates health care jobs and supports lots of health care, but it is well established that we do not get enough bang for our buck in health outcomes compared to other wealthy countries that spend far less as a share of GDP, and it crowds out spending on other priorities while putting pressure on federal and state budgets and wages.

Spending growth has not been as high recently as it was in the past. Projecting health spending is not an exact science and CMS has over-projected the growth in spending before. Real world events such as pandemics affect utilization and spending. We have all long-described health care as consuming one-fifth of the economy. With an aging population, advancing technology and expensive new drugs, and a for-profit health system driving price increases, the CMS projections likely mean that health care spending will officially hit that mark sometime early in the next decade, if not earlier.

Solutions to these twin crises often work at cross purposes with one another. Addressing affordability has recently meant spending more to cover more people, enhance coverage, and subsidize coverage as we have been doing through the ACA marketplaces and Medicaid expansion. It’s a reality that government (taxpayers) spends more to make health care cost less for people. Likewise, increasing deductibles or taking other measures to slow demand for care will increase out-of-pocket costs for consumers. It is another example of how health policy is nothing if not a difficult series of tradeoffs.

The two problems also play out differently politically. Making health care more affordable is politically popular while reducing the rate of increase in overall health spending is not. It means cutting increases in payment rates in Medicare and Medicaid, which providers resist, restraining prices and regulating rates (the same), or curtailing consolidation to maintain the semblance of competitive markets (again the same). Provider resistance can often garner public support. If you ask the American people if they are for spending more for health care or less, they are almost always for spending more, especially when it’s about their own local health care institutions. Many years ago, I wrote a book with some colleagues about efforts to “rationalize” the health system through what was then the National Health Planning and Resources Development Program, an elaborate system of federal, state and local agencies backed by Certificate of Need authority. Local residents sometimes marched in opposition when it was their hospital or their obstetrics service or their trauma center that planning agencies decided was “unnecessary,” or their hospital that should not be expanded. The law, now largely forgotten, was repealed.

It is long established that high prices are the principle culprit behind our high national health spending. But there are few serious efforts to take on prices. Transparency initiatives are one attempt to get at prices by enabling consumers to shop for better prices, but useful information is hard to come by, people can’t really shop when they are sick, and results have been lackluster. Hospital global budgets and cost targets in some states represent more aggressive steps to get at spending and prices, as do efforts to hold the line on further consolidation in already largely consolidated hospital and insurance industries.

One big exception to the slog on health costs: The action policymakers took granting Health and Human Services the authority to negotiate prices for some drugs purchased by Medicare, as well as reducing monthly copays for one high profile drug, Insulin, to $35 for seniors. In some ways the remarkable thing about this was how difficult it was to achieve given the widespread popularity of the policy and the relative unpopularity of drug companies. These steps may prove to be a foot in the door for further action, that’s why they were so fiercely resisted. But by the numbers, drug spending still represents less than 10% of overall health spending (closer to 20% for many private purchasers).

One reason efforts to take on health care costs are fragmented may be that there are currently no national goals for health care costs and no requirement for a national strategy mandated by Congress, nor is there a government agency or official responsible for national planning to address health care costs as its overall charge. The Office of the Actuary in CMS documents health spending and makes projections, but it doesn’t address solutions. Parts of CMS deal with specific programs—Medicare, Medicaid, and the ACA—but CMS does not view its job as controlling costs in the entire health care system (the agency had a broader vision early on when it was first formed and was called the Health Care Financing Administration). The end result is that we have two larger health cost crises—an acute one, affordability, and a chronic one, spending—several other serious health cost problems, and no national strategy on health care costs, even a catchall that skirts controversy by throwing a little bit of everything at these problems.

View all of Drew’s Beyond the Data Columns

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