Health Care Cost Drivers

We talk about it all the time – what is really driving health care costs?  Politicians on both sides of the aisle often take the easy route by simplifying this complex question.  Let's dig deeper.  

Familiar answers include: 

  • Failing health of Americans to which the solution is a company wellness plan. 
  • The rising costs of treatments for diseases – think of all the pharmaceuticals that exist today that didn’t 10 years ago and the rate at which prescriptions are used to treat disease. 
  • People are living longer…

While the familiar answers are all true and the solutions we employ are all valid, there must be other problems that are affecting our costs. So, I have been doing more research and have become a bit of a detective.  The more we understand how health care works and what drives costs, the more opportunities we have to shape what happens in the future.  I expect my list to grow over time, but for now, below are a few facts that may be new to you.


Medicare regulates the private market.  What physicians don’t receive in reimbursements through Medicare, they must make up for someplace else.  Enter private insurance.  Where Medicare’s reimbursement rates are generally lower than private coverage reimbursements, and as our Baby Boomer generation continues to age, physicians’ patient loads are moving at a faster pace towards Medicare coverage.  The physician must make up for the lack of reimbursement from Medicare by pressuring private insurance companies to reimburse more.  The result is higher premiums and copays to the privately insured company and individual. (source:  How Capitalism Will Save Us, Steve Forbes)

Relative Value Update Committee

Check out the Relative Value Scale Update Committee (RUC).  For two decades, this committee, part of the American Medical Association, has been Medicare’s sole advisor on the value of physician services.  Centers for Medicare and Medicaid (CMS) accepts the majority of the RUC’s recommendations “hook, line and sinker”. Why is this important?  The RUC recommends to Medicare what primary care physicians and specialist get paid through Medicare reimbursements.  More monetary value is given to specialists over those of primary care physicians.  Incidentally, the majority of committee members are specialists.

If specialists are paid more and primary care physicians are paid less through Medicare, we find the following result:  Primary care visits are shorter in length because physicians must see more patients to obtain the revenue necessary to continue a viable practice.  Primary care providers cannot adequately assess patients in a shorter time frame and, therefore, refer patients to specialty care.  Conversely, specialists are incented to over-treat patients. It certainly explains the rise in nurse practitioners at physician offices and convenience clinics.  It is less expensive to employ a nurse practitioner to treat minor illnesses and injuries and refer patients to specialists when the care required is beyond the scope of his or her practice. 

Bottom line:  Patients are exposed to greater risk and taxpayers, business owners, and individuals who purchase health insurance are exposed to higher and higher costs because greater utilization of specialists requires higher reimbursements of insurance carriers, both Medicare and private insurers.  (source: “The Most Powerful Health Care Group You’ve Never Heard Of,”, Brian Klepper and Paul Fischer)

Medical Malpractice Insurance

Just recently, the Missouri Supreme Court overturned a decision to cap medical malpractice awards at $350,000.  The cap was part of a 2005 tort reform package that passed in the Missouri General Assembly.  With the cap gone, insurance underwriters may have no choice but to increase the cost of malpractice insurance to physicians.  Underwriters are conservative in nature; they safeguard an insurance company’s finances and seek to earn revenue for their companies.  With the cap eliminated, the expectation is that malpractice insurance will rise.  If malpractice insurance costs rise for physicians, we can be sure to see an increase in our health care premiums as a result.  Primary care physicians will have to balance the increase in reimbursements with a growing patient load to help cover a rise in overhead. (source:  West Newsmagazine, August 29, 2012)  Shorter primary physician visits could feed into more specialist referrals.

Final Thoughts

These are a few cost drivers.  I am sure that I have only begun to scratch the surface.  When we start delving into the factors that determine what our providers are paid or what they have to pay, we begin to truly understand how these factors affect us, the consumer.  There are solutions to our health care cost crisis in these details.  These factors need to be brought into the health care reform discussion to bring about meaningful, actual change that can positively affect everyone.