What Does Increase in Health Care Costs Mean and How Does it Impact Consumers?

As Americans struggle with rising health care costs, many are left wondering what this increase really means and its effect. Higher prices result from both increased utilization and healthcare inflation; causes include an aging population and demand for medical services; its effect is further compounded because healthcare prices tend to be set two or three years in advance, making them less responsive to broader economic trends.

2021 saw both prices and utilization growth lower than pre-pandemic projections, due to decreased government expenditures to meet COVID-19 pandemic needs and consequent pent-up demand from patients postponing or forgoing care, offsetting increased utilization due to postponing care altogether. Furthermore, higher than anticipated inflation across the broader economy has increased input costs for healthcare providers such as wage increases and energy prices; wage hikes in particular are particularly burdensome on hospitals.

In 2022, hospital spending represented 30.4% of US healthcare expenditures overall; followed by prescription drug spending (17.9%) and physician/clinical services (12.7%). Out-of-pocket spending comprised 33.1%. Individual out-of-pocket costs increased more rapidly than prices or utilization due to increasing health insurance premium costs and spending on services like dental visits, durable medical equipment purchases, prescription drugs etc.

Over the past decade, health insurance premiums have seen significant annual inflation, driving up overall healthcare costs significantly. Individuals paid an average individual premium of $7911 while family coverage averaged $22,463. Furthermore, consumers’ increased reliance on high-deductible health plans has led to additional out-of-pocket costs.

Americans suffer the highest rates of preventable deaths and lowest life expectancies among peer nations, even though many advanced healthcare options exist here. There are a number of key contributors that contribute to such high prices and suboptimal results:

These include lack of transparency in medical billing and high hospital and medical equipment costs. However, new legislation (No Surprises Act) and initiatives aim to create greater healthcare billing transparency by mandating that doctors and hospitals disclose costs of procedures prior to performing them. In the end, this will enable Americans to make informed decisions regarding their health, and find better value for the money spent on healthcare services. As long as these issues remain unresolved, health care prices will only continue to increase along with higher out-of-pocket costs for consumers and limited access to services and medical equipment. To better understand how rising healthcare costs impact American families, visit the AMA Policy Research Perspective on what drives higher prices and utilization – this article includes a free download of its full report!