The rise in health care spending and what to do about it.
ABSTRACT Reforms for slowing the growth in health care spending and increasing the value of care have largely focused on insurance-based solutions. Consumer-driven health care represents the most recent example of this approach. However, much of the growth in health care spending over the past twenty years is linked to modifiable population risk factors such as obesity and stress. Rising disease prevalence and new medical treatments account for nearly two-thirds of the rise in spending. To be effective, reforms should focus on health promotion, public health interventions, and the cost-effective use of medical care.
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The Rise In Health Care Spending And What To Do About It
Kenneth E. Thorpe
Health Aff. 2005;24(6):1436-1445. ©2005 Project HOPE
Abstract and Introduction
Reforms for slowing the growth in health care spending and increasing the value of care have
largely focused on insurance-based solutions. Consumer-driven health care represents the most
recent example of this approach. However, much of the growth in health care spending over the
past twenty years is linked to modifiable population risk factors such as obesity and stress. Rising
disease prevalence and new medical treatments account for nearly two-thirds of the rise in
spending. To be effective, reforms should focus on health promotion, public health interventions,
and the cost-effective use of medical care.
Over the past five years the cost of health insurance has risen 54 percent. This persistent rise
has recently been attributed to the low out-of-pocket costs paid by consumers. By not knowing
the full costs associated with health care, consumers demand more and "overuse" it (moral
hazard). The growth in spending has also been linked to the rising use of prescription drugs and
new medical innovations and treatments. Still others believe that the rise can be traced to the
lack of competition in the health care marketplace and have proposed new approaches for health
plans to compete on price and outcomes.
Economists thinking about rising health care spending note that there are only two approaches
for slowing its growth: reduce spending on high-cost medical care that produces no benefits, and
reduce spending on high-cost care that yields some health benefits butatevenhighercosts.Along
theselines,some have proposed that we need to "ration rationally" to slow spending growth.
Although this may be true, this approach ultimately involves some form of rationing and difficult
decisions concerning the introduction of new technologies. Proposals to increase patient cost
sharing under consumer-driven models are designed to place consumers in the position to make
these health care judgments for themselves.
With the diagnosis of the problem identified as low consumer cost sharing and rising discretionary
use of services, the policy solutions have focused on demand-side interventions. These
innovations are designed to reduce the discretionary use of health care thought to account for
most of the growth in spending. Consumer-driven approaches include the broader dissemination
of information to consumers about prices and quality coupled with products such as health
savings accounts (HSAs). The HSA concept is designed to reduce spending by making
consumers more conscious of their use of routine medical care. Consumer-driven health care has
dominated the recent cost containment debate.
However, nearly two-thirds of the rise in health care spending is linked to a rise in treated disease
prevalence (for example, diabetes) and innovations in medical treatment. Health behavior such
as overconsumption of food, lack of exercise, smoking, and stress accounts for approximately 40-
50 percent of morbidity and mortality. Thus, a reliance solely on the consumer-driven model is
not likely to solve the problem, since it would do little to address the key factors that underlie the
rise in health care spending. Indeed, missing from the list of solutions for slow-ing health
spending growth are public health and preventive interventions at the population level that target
the rise in treated disease prevalence. Moreover, given the important role that medical
innovations have assumed in expanding treatment, options for discouraging the diffusion of high-
cost/low-benefit technologies also need exploration. To date, U.S. cost containment policy has
focused too narrowly on demand-side interventions such as changing the design of insurance
benefits and increasing cost sharing.
This paper summarizes the factors responsible for the rise in health care spending during the
past twenty years. As the data show, most of this rise has been driven by a rise in treated disease
prevalence, fueled by an increase in population risk factors such as obesity and by innovations in
the treatment of chronic disease. The bulk of the paper then outlines a series of reforms that are
designed to address the factors responsible for the rise in spending.
What Accounts For The Rise In Health Care Spending?
The growth in real per capita health care spending is simply the growth in spending per treated
case times the number of medical conditions treated (treated disease prevalence). Elsewhere my
colleagues and I have apportioned the rise in spending over time into these two categories and
concluded that approximately 63 percent of the rise in real per capita spending is traced to a rise
in treated disease prevalence (Exhibit 1). This rise is caused by rising prevalence of disease in
the population, changing clinical thresholds for diagnosing and treating disease, and innovations
(new technology) in treatment. The discussion distinguishes among these sources, since some of
the rise in treated prevalence is likely desirable (primary prevention of hypertension, more
aggressive treatment of patients with the metabolic syndrome, lipid control, and treatment of
prediabetic patients), while other sources could be prevented, such as the rise in obesity.
Factors Accounting for the Rise in Real U.S. per Capita Health Spendng
Rise in Treated Disease Prevalence
Some of the rise in treated disease is linked to a rise in population disease prevalence. Previous
work has indicated that the rise in modifiable population risk factors such as obesity accounted for
approximately 27 percent of the change in health care spending between 1987 and 2002. This
reflects a rising share of obese adults and a concomitant rise in population prevalence of disease
such as diabetes, as well as a rise in spending among obese adults relative to normal-weight
adults. The rise also reflects an expanded menu of medical treatments for patients with chronic
illnesses linked to obesity. A rise in treated disease prevalence accompanied the rise in obesity
among both children and adults between 1987 and 2002. The rising prevalence of treated
conditions includes back problems (rising from 4.6 percent to 8.1 percent of the adult population),
mental disorders (from 4.6 percent to 11 percent), diabetes (from 2.4 percent to 4 percent), and
several cardiovascular risk factors such as hypertension and hyperlipidemia.
Changes in Clinical Thresholds for Treatment
Changes in clinical thresholds for treatment have resulted in more patients' being treated for
asymptomatic conditions. This reflects a desire for preventive interventions of patients with
asymptomatic symptoms of several cardiovascular disease risk factors such as diabetes,
hypertension, and hyperlipidemia. Treatment thresholds have changed for these risk factors
during the past twenty-five years. This reflects a desire for earlier clinical intervention to reduce
the severity of each of these conditions. For instance, treatment thresholds for hypertension have
steadily been lowered from systolic blood pressure =160 mm Hg or diastolic blood pressure =95
mm Hg (in 1980) to lower levels of 140/90 over time. More recent recommendations have
focused on the need for more aggressive primary prevention of hypertension. The more
aggressive treatment (down to blood pressure levels of 120/80) targets those most at risk of
developing hypertension. The recommendations would greatly expand the number of Americans
targeted for primary prevention. An estimated twenty-three million adults are estimated to have
high-normal blood pressure readings of 130-139 mm Hg systolic or 85-89 mm Hg diastolic.
Similar changes have occurred in lipid control, where recommended levels for treatment have
declined from total cholesterol levels of 240 down to 200 (along with a recommendation to reduce
low-density lipoprotein lev-els for moderate-and high-risk people to under 100). Recommended
thresholds for the preventive treatment of diabetes have been reduced from impaired fasting
glucose levels of 110 to 100. An estimated twelve million Americans have "prediabetes," which
falls within this threshold.
As a result of these changing thresholds, the number of adults treated for these three medical
conditions has increased sharply. At issue is whether the more aggressive treatment and control
will result in improved cardiovascular outcomes and whether the added spending will produce
even larger improvements in health outcomes. Some preliminary evidence indicates that
increased use of antihypertensive medicines and statins has been associated with reductions in
blood pressure and total cholesterol levels among adults during the past twenty years.
Innovations in Treatment
Innovations in medical treatment have also assumed a key role in the growth of treated disease
prevalence. Most of the rise in spending per treated case identified in previous work is linked to
innovations in pharmacologic treatment options as well as new treatment procedures. For
instance, spending per newborn delivery rose fivefold between 1987 and 2002. The higher
spending reflects a wealth of new technologies (such as neonatal intensive care, incubators,
steroids, and ventilators) aimed at improving the survival rates among low-birth weight babies.
These innovations have been very successful in reducing infant mortality rates, which have
declined from 8.9 to fewer than 7 deaths perthousandlivebirthsoverthe past fifteenyears.
In addition, new pharmacologic treatment options have expanded the share of patients with
several medical conditions-including depression, hypertension, and hyperlipidemia-under
treatment. For example, drug treatment options- particularly the development of selective
serotonin reuptake inhibitors (SSRIs)- have given physicians new approaches for treating
patients. For depression alone, the share of patients prescribed a psychotropic medication
increased from 45 percent in 1987 to nearly 80 percent a decade later.
Implications For Health Care Reform Proposals
As outlined above, much of the rise in spending can be traced to the rise in obesity and new
medical technologies. Yet much of the recent discussion concerning health care reform has
focused on demand-side reforms such as HSAs and consumer-driven health plans. Even if such
plans were adopted by all insured adults today, they might have only a limited impact on the level
and growth of health care spending. For instance, approximately 90 percent of health care
spending is for sicker patients spending $1,000 per year or more. Moreover, about 80 percent
of health care spending is traced to patients with largely predictable health care needs and
expenses: the chronically ill. Finally, the faster adoption of HSAs and consumer-driven products
would have done little to address the rise in obesity prevalence, stress, and other population risk
factors that resulted in the rise in disease prevalence during the past twenty years.
This is not to say, of course, that demand-side interventions should not be pursued; they should
be. Instead, the analysis indicates that a broader menu of reforms, including public health and
population-based interventions and more effective models for treating chronically ill patients,
should be at the core of efforts to slow health care spending growth.
A Menu Of Potential Reforms
Perhaps the most important strategy for reducing the growth in health care spending without
reducing benefits is to focus on slowing or reversing the growth in obesity prevalence. This will
require interventions designed to change behavior with respect to diet and exercise. These
strategies should target schools and the rise in childhood obesity, the workplace, and
communities in general. Changing behavior is difficult, although we do have an important case
study in reducing smoking in the population. Today, approximately 22 percent of adults age
twenty-five and older are smokers, compared with 33 percent in 1979.
The psychology literature has outlined the process by which people change their behavior. This
research has identified distinct stages that accompany behavior changes such as smoking,
drinking, exercise, and diet. Lessons from this line of research will be important to include in the
design of population-based behavior change programs.
Another key design issue is to how to get people to participate in behavior change programs and
sustain their participation. Unfortunately, there have been few successful interventions used in
health care to reduce weight, modify diets, and lower stress. Some employers have adopted
worksite health promotion programs, although these vary greatly in terms of design, intensity of
the intervention, rates of participation, and results. Yet well-designed programs do show
promise. A recent review of the literature found an average savings of $3.93 for each dollar
invested in a health promotion program. The literature also reveals substantial variation in the
design, comprehensiveness, and effectiveness of the limited number of programs now in
existence. A key policy challenge is to identify empirically the key design features of effective
programs and provide strong incentives for employers to adopt them and for workers to
Three new initiatives outlined below could prove helpful in slowing the growth in future health care
Federal Financial Incentives for Workplace Health Promotion Programs
Only about 30 percent of employers have any health promotion programs, and only about 10
percent of these can be viewed as comprehensive. Thus, the challenge is to provide incentives
for employers to adopt comprehensive worksite health promotion programs and to attract broad
and sustained enrollment among workers. Previous research has also found that approximately
80 percent of adults do not meet the guidelines for physical activity and fruit and vegetable intake
established by the U.S. Centers for Disease Control and Prevention (CDC).
A two-part approach is needed to address this problem. A first step would be to charge the CDC
with outlining the elements of a comprehensive workplace health promotion program. Identifying
best-practice programs would be based on empirical evidence of the key design features that
have proved effective in changing individual behavior. A second step to create strong incentives
for employers to adopt worksite programs would also be important. For instance, the federal
government could provide refundable tax credits(or,in the case of not-for-profit and government
employers, direct subsidies to pay for the programs) for employers that adopt comprehensive
promotion programs. The size of the tax credit (say, 50- 75 percent of the cost of the program)
should be large enough to assure widescale adoption of the programs by employers.
Few smokers or obese adults use health promotion programs when they are available. Thus,
multiple approaches for increasing enrollment will be required. Employers and health plans could