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Cost Drivers

What Drives Healthcare Spending?

For decades, healthcare costs have risen at rates that outpace the general rate of inflation.

What’s more, there is strong evidence that we aren’t getting the value that we should for our healthcare dollar. Quality is uneven and an estimated 30 percent of our spending is considered unnecessary.

These cost and value issues aren’t just an academic exercise—healthcare costs are an urgent problem and have a profound impact on the health and financial security of American families.

More information on cost drivers is below. Also see the interactive and PDF versions of our Cost Driver Infographic. Also, this infographic shows what other products would cost if they increased as much as healthcare.


Rising Prices

Spending more per unit of healthcare is the major reason U.S. spending increases every year—not increases in the services we get. A major reason for rising prices is market power that enables providers, drug manufacturers and others to charge prices substantially above cost.

 
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Market Power

Most researchers believe that consolidation leads to higher prices and only minimal gains in efficiencies. Some potential benefits include streamlined administrative functions, clinical integration, higher quality care and better health outcomes. [Learn more!]

 
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Advances in Medical Technology

While many medical advances produce better results, some are more expensive without providing a net benefit to patients. For reasons of marketplace positioning, successful marketing or other reasons, we sometimes see adoption of technological advancements before the cost-benefit of these technologies is known. [Learn more!]

 
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Prescription Drug Costs

Prescription drug costs currently account for 11 percent of overall health spending, but the period of low drug spending growth is coming to an end due to increased spending on prescription drugs and the diminishing cost-saving impact of generic drugs. [Learn more!]


Unnecessary Services

The Institutes of Medicine identified unnecessary services (e.g., duplicative tests), inefficient care delivery (e.g., test results not shared), and prevention failures (e.g., missed flu shot) as examples of waste in our healthcare system. Roughly 30 percent of healthcare spending—around $750 billion—is wasted on unnecessary or poorly delivered services and other needless costs.

 
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Medical Harm

Perhaps the most egregious form of waste are services that are not needed that also harm the patient. Our nation doesn't do a good job of tallying the total cost of medical harm. However, the limited resources devoted to prevention are dwarfed by the resources spent to treat the consequences of this mostly preventable problem. [Learn more!]

 
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Waste

Experts estimate that 15-30% of our healthcare spending is “wasteful,” but progress has been slow on how to eliminate waste without negatively impacting consumers’ health. [Learn more!]


Lifestyle Factors

Contrary to popular belief, lifestyle considerations, like smoking and obesity, are not major drivers in healthcare spending, compared to rising unit prices and overutilization of services. That said, addressing the underlying causes of preventable chronic diseases would save money and lead to better quality of life.

 
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Chronic Diseases

Strong evidence reveals that chronic conditions account for a large share of U.S. health spending; however, most of the spending increase is accounted for by the rising prices for the services associated with treating these conditions, and not its increasing prevalence. [Learn more!]

 
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Obesity

Obesity rates are expected to climb but progress is being made on the population health measures that can help. [Learn more!]

 
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Smoking

While tobacco-related healthcare costs run in the billions, smoking is not a major cost driver due to lower rates of smoking than other developed countries and slow growth rates of spending on treatment of respiratory conditions compared to GDP.