Reasons Why Healthcare is So Expensive

Access to a good healthcare system plays a significant role in the economic growth and development of any country. Despite the sluggish economic growth rate in many countries, healthcare expenditure continues to increase. Healthcare spending is estimated to be 22% of the gross domestic product of many economies by 2038. The community-based organization also estimates that spending on healthcare programs such as Children’s Health insurance and Medicare will increase at a much faster rate than the economic growth rate. The factors behind rising health care spending are complex and involve the interaction of both financial and non-financial factors. For instance, healthcare in the United States of America costs twice as much compared to other developed countries with a similar level of economic development. The United States of America spends $3 trillion annually on the healthcare sector. Financial burden could be higher than $3 trillion if other indirect costs such as the cost of lost wages, higher premiums, and taxes were included. Despite the huge financial spending on healthcare, the United States of America was ranked number 37 by the World Health Organization. Astronomical medical spending has been straining budgets of many countries, thus hindering their ability to meet other national needs. There is a wide range of both financial and non-financial reasons why many countries are unable to provide adequate healthcare services at reasonable rates. The purpose of this study is to explore financial and non-financial reasons of rising medical expenses.

The financial cost, which makes health care expensive, includes drug, administrative, defensive medicine, and a mix of treatment costs and workers’ wages. The administrative costs of operating healthcare systems in many countries are astronomical. Administrative cost such as the cost of detecting fraud, wellness programs, investment in information technology, and disease management incurred by insurance companies contribute to the rise in medical spending.


The rise of healthcare prices has a major impact on healthcare spending. Research indicates that a consistent increase in healthcare prices account for about 10% to 25% of the total health sector spending. Providers’ market powers contribute greatly to spending growth. Physicians, hospitals and other healthcare service providers have been merging and consolidating in the recent past so that they can have greater control over healthcare prices. Research indicates that mergers and consolidation by market power accounts for 5% increase in hospital rates.

The non-financial factors, which increase healthcare expenses, include medical technology, market powers, health insurance coverage, demographic and patient factors, healthcare services, and product prices. Research indicates that technology has a significant role in the rising healthcare spending in many countries and it is projected that by 2038 38% rise in healthcare spending will be due to medical technology. The rising cost of medical technology is a key contributor to increasing health care spending. Introduction of new medical technology has drastically increased healthcare spending by 38 % to 65 %. New medical technology has enlarged the scope of treatment options available to patients; however, it has achieved this by replacing lower-cost options with higher-cost alternatives.

Government regulation is a non-financial factor which has made healthcare services expensive. The government increases the demand for healthcare through various laws, which make accessing healthcare services easier, on the one hand, but restrict supply of hospital and healthcare professionals, on the other hand. The cost of health care grows two times faster than the rate of inflation. Economists argue that the rise in medical price since 1965 has been caused by an increasing demand for health-care combined with a restricted supply. The market reformers desire to preserve control of individual healthcare givers over their practice, fees, and hospitals. Governments simply desire to expand medical schools in order to meet the demand for healthcare professionals, offer patients a wide range of choices among doctors and hospitals, and provide the public with subsidies for medical expenses. The majority of medical policymakers support either nationalisation or monopolisation of health services. The history of increasing medical cost due to government interference in the health care sector appears to support the theory that prices were set by the interplay of laws of demand and supply before 1980. Even the degree of nationalisation and monopolisation promoted by politicians prior to 1965 was not sufficient to cause a significant rise in medical cost and spending. Until demands created by Medicaid and Medicare, the restricted supply of hospitals and health care professionals was not so evident.

Health insurance cover has also contributed to increasing healthcare expenses. Getting insurance cover has the potential of reducing the patient’s incentive of looking for a more efficient and lower-priced care. A study on the insurance coverage has revealed that insured persons used 25% more healthcare services as compared to uninsured person. However, the trend has been declining over the last few years with insurers and employers shifting fiscal responsibility to the patient in the form of higher deductibles, copayments, and coinsurance. Moreover, a health insurance company is paid a certain percentage of claims they handle; hence, they encourage wasteful spending so that their revenue can increase. To complicate the situation further, insurers are never keen to perform their duties with some level of competence so that they can deter fraudulent claims. Research indicates that in the United States of America alone, the population with medical insurance cover experienced 7.2% rise in their share of medical spending between 2011 and 2012 and health care spending per family exceeded $20,000 in 2012.

Demographic composition and patient characteristics influence medical expenses. Changes in age composition and health status of persons in a country can have a far-reaching healthcare implication. Normally, as people advance in age, their medication expenses increase. Therefore, a country with the ageing population is likely to spend more resources on health care services as compared to a country with a relatively young population. The ageing population also contributes to the rise in medical expenses. Persons aged 65 years and above spend much more resources on health care as compared to young people.

One of the basic functions of a healthcare system is introducing a healthcare financing mechanism to caution the population of any financial risk arising from ill health. Such financial risk can be quantified or non-quantified. Quantified expenses are further grouped into two categories: catastrophic health expenditures and impoverished medical expenditures. Catastrophic health expenditure is out-of-pocket expenditure on health care services that exceeds a certain percentage of a household’s income, therefore making the household unable to meet other needs. In turn, impoverished medical expenses refer to health-care spending which pushes a household below the poverty line.

A research conducted in the United States of America has revealed that the country’s healthcare expenditure was approximately $2.6 trillion in 2010. 51% of the total spending went to pay medical services rendered by hospitals and physicians, while prescription of drugs accounted for 10%. Furthermore, the study has revealed that physicians in the United States of America are 5 times more expensive than physicians in other countries.

A key factor driving the rapid rise in hospital price is consolidation and merging of the hospital industry. Hospital acquisition and merger rose by 33% between 2009 and 2010, leading to 20% increase in healthcare prices. Advancement in medical technology helps physicians treat diseases and even delay death. However, medical advances also increase health care spending. Patients demand to be treated with the most current technology even when there is little scientific evidence to support safety of the technology. The treatment cost with the use of the newest technology will, therefore, be higher than the one they replace.

Healthcare providers charge higher prices in some countries like the US as compared to prices charged in other countries in Europe, which increases the overall healthcare cost. The primary reason why some countries charge higher prices includes expensive medical technology, for example, machines used to treat cancer and higher levels of lifestyle diseases. Furthermore, as the economic growth of a country improves, medical expenditure also increases. For instance, a higher level of economic growth in America has greatly contributed to the increasing healthcare spending in the US.

Wasteful spending has contributed greatly to the rise in healthcare spending. Research indicates 33% to 50% of medical spending is wasteful. This is normally the case for those patients who have health insurance cover. Areas of wasteful spending include purchase of defensive medicines and unnecessary procedures and tests. Other factors that encourage wasteful spending include ignoring of medical advice, non-adherence to prescription, obesity, smoking, and drug abuse. Unhealthy lifestyle has also contributed to the rising healthcare spending. The ever rising burden of chronic diseases caused by an unhealthy lifestyle has led to increased healthcare costs. Researchers predict a 42% rise in lifestyle diseases by 2023, costing countries $4.2 trillion in treatment costs in addition to the lost economic productivity.

In conclusion, unless a country deals with the financial and non-financial factors which increase healthcare expenses, it will continue spending many resources on healthcare services. The main financial factors which raise the cost include administrative cost, medical technology expenses, hospital and physicians’ fee, high insurance premiums, especially for the ageing population, and consolidation of medical service providers among others. The non-financial factors include government regulations, unhealthy lifestyle, demographic composition, patient characteristics, and influence of the market power. In comprehensive logic, there is a need to employ a multidimensional approach to check the rising medical expenses.

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