Health Care Costs

"The principles of Jefferson are the axiom of a free society"

Abraham Lincoln

A Nonpartisan Economic, Health and Public Policy Research Foundation

American Health Care Costs


Currently we are spending twice as much as any other country on health care with similar or worse outcomes. What is the source of this inefficiency?

Most of the reversible cost drivers derive from our fragmented procedure driven health care delivery driven by the perverse incentives of the third party payment system. These perverse incentives are directly responsible for over- consumption by patients and over- utilization by providers.

Every patient visit results in a full court press in billable claims but curiously, a dwindling amount of actual service provided to the patient. This is caused by the increasing paperwork requirement associated with claims for medical procedures in conjunction with decreasing re-imbursements. Providers are top heavy with staff that shuffles paperwork but do no patient care. As provider’s re-imbursement dwindle due to under market payment, more time is spent in paperwork associated with claim processing and follow-up and less time with patient care.

There is a perverse incentive for the physician to spend only enough time with the patient to determine which procedure codes will be submitted for the visit on that day and then move on to the next patient. Only in this way can the physician maintain enough income to pay for his increasing overhead due to the increasing paperwork requirement. This system has spun out of control and is driving costs at an increasing rate.

The recent pay for performance just worsens this pernicious process by adding to the paperwork burden. This system actually hurts the quality of patient care. Physicians who are only responding to these perverse incentives spend more time in preparing documentation required for re—imbursement than they do in direct patient care. This is not only inefficient it is dangerous.

Perhaps it would be better to replace third party payment with a lump sum payment to the patient’s tax favored account so the patient has more control over the spending of his health care dollar. In addition we need to create proper incentives for all market participants. This is the only way to stop rising health care costs.

Table 1-Health Care Cost Drivers

(Health Insurance Premium Inflators)


  1. Insured individuals using services whose cost is greater than their benefit and price (Moral Hazard) (reversible)
  2. Reduced physician re-imbursement which provides perverse incentives for physician induced demand for expensive high tech procedures (reversible)
  3. Consumer demands for easier and broader access to care and for service intensity; Consumer demand for expensive high tech procedures (reversible)
  4. A growing and aging population (not reversible)
  5. Third party payment which provides perverse incentives to patients to over consume and to providers to over-utilize (reversible)
  6. Fragmented Fee-for-procedure medical delivery and the costly infrastructure necessary to file claims and for the follow-up necessary to get paid (reversible)
  7. Costly opaque administrative mechanisms of managed care and Medicare (reversible)
  8. Excessive micromanagement of physicians (reversible)
  9. High administrative costs and central organizational overgrowth and Federal Government Legislation/Regulations (reversible)
  10. Cost shifting among payers and from government payers to private sector Purchasers (increased insurance premiums); (reversible)
  11. Cost-shifting to the taxpayer for unpaid care from the uninsured and under market payment from Medicaid, Medicare, Tri-care. And private insurance
  12. A longer and deeper insurance underwriting cycle; they raise premiums in order to restore their profitability Insurer Premium “Catch-up”  (reversible)
  13. Rapidly escalating prescription drug costs and utilization (reversible)
  14. Tougher provider negotiations with health plans for higher reimbursement (reversible)
  15. An oversupply of hospital beds, high tech equipment and specialists (reversible)
  16. Volume of medical services provided for inpatient care (reversible)
  17. Defensive medicine by physicians to protect against malpractice suits (reversible)
  18. Excessive and inappropriate treatment at the end of life, (reversible)
  19. General price inflation [the Consumer Price Index (CPI)] (reversible)
  20. Poor quality care including errors, overuse, misuse and under-use of health care services [avoiding sick patients, lowering staff-to-patient ratios, and denial of care on the part of some insurers and health plans (reversible)
  21. State Insurance Mandates (reversible)
  22. State Solvency Requirements (reversible)
  23. Fraud and Abuse (reversible)

Twenty-two of these twenty-three cost drivers are reversible and eliminated by the American Health Care Plan.