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Causes of High Health Care Costs


Roger I. Schreck

, MD, Merck Manual

Last full review/revision Mar 2020| Content last modified Mar 2020

Health care costs in the United States are disproportionately high for many reasons. (See also Overview of Health Care Financing.)

  • Many factors, particularly the use of expensive new diagnostic tests and treatments, contribute to the high cost of health care.
  • Use of these new tests and treatments does not necessarily result in better health.
  • In the United States, administrative costs, mostly related to private insurance, account for 20 to more than 30% of health care costs.
  • Reducing doctor fees is not likely to reduce health care costs very much.
  • Aging of the U.S. population probably has not contributed greatly to the increases in health care costs but may do so as baby boomers age.

Use of expensive new diagnostic tests and treatments

Use of expensive tests and treatments may contribute to increasing health care costs more than any other factor. Use may be appropriate or inappropriate, but in either case, cost is increased.

An example of appropriate but expensive treatment is the use of clot-dissolving (thrombolytic, or fibrinolytic) drugs or a procedure to clear the arteries (such as angioplasty) to treat a heart attack. These treatments are very effective and save lives. But many new and expensive treatments are ineffective, are only slightly better, or are used inappropriately in people who are unlikely to benefit. For example, bones (vertebrae) in the lower back are sometimes fused together to treat chronic low back pain. Many experts think this treatment is ineffective and/or greatly overused.

How often these expensive treatments are used varies greatly from region to region and sometimes from doctor to doctor. For some disorders (such as coronary artery disease), the results of treatment on health are no better in regions where some expensive treatments are used very often than in regions where they are used less often.

Increased costs of health care goods and services

Drug costs have increased. One reason is the increasing cost of developing a new drug, often about $1 billion. Because drug development costs so much, drug companies are not motivated to develop drugs that are less profitable, such as vaccines, drugs used to treat rare disorders, and even antibiotics. This reluctance can negatively affect public health by, for example, limiting the number of drugs and vaccines available to prevent and treat serious infections.

Marketing of new drugs, devices, and procedures

When consumers hear about a new (and expensive) treatment on television or online, they may want to be treated with it and convince their doctor to use it. As a result, expensive, new treatments may be overused or used inappropriately. Some of them are no more effective than older, less expensive ones.

Overuse of specialists

Specialists are increasingly providing more care, partly because the number of primary care physicians is decreasing and partly because more and more people want to see a specialist.

Specialty care is often more expensive than primary care. Specialists charge more and may do more tests than primary care doctors. Also, people who have more than one disorder may require several specialists (who have a more narrow focus) to evaluate and treat them, when one primary care doctor (who has a broader focus) might be able to do so.

High administrative costs

The percentage of health care dollars spent on administration is estimated to be 20 to more than 30%. Most of these costs come from private insurance companies; however, the Affordable Care Act now limits the amount that private insurance can spend on administrative costs. Companies that provide private insurance spend money on marketing and evaluation of applicants to identify those with preexisting disorders or the potential for developing a disorder. These processes do not improve health care. Also, having to deal with many different private insurance plans typically increases administrative costs for health care providers by making processes (such as claim submission and coding) more complicated and time-consuming.

Doctor fees

Doctors in the United States are paid more than many other professionals in this country and more than doctors in many other countries. Part of the reason is that doctors in other countries typically spend far less on their medical education and malpractice insurance than those in the United States do, and the costs of running an office in other countries are lower.

Doctor fees account for about 20% of total health care costs. Thus even a significant reduction in these fees would have only a modest effect on overall costs.

Malpractice costs

These costs include

  • Malpractice insurance
  • Tests and procedures done to protect against being sued for malpractice, rather than to ensure the health of the person (called defensive medicine)

Doctors, other health care providers, health care institutions, and drug and device manufacturers pay premiums for malpractice insurance. These premiums cover claim settlements and the overhead and profits of malpractice insurance company. Ultimately, these costs, at least in part, are passed on to the government and/or consumers.

These costs and the threat of lawsuits can be burdensome for individual doctors (particularly those in certain high-risk specialties and geographic areas). Nonetheless, the amount of money spent on premiums (the fee paid to an insurance company to have malpractice insurance) each year is only about 0.3% of total health care costs. Also, the amount of money spent in malpractice settlements represents an even smaller percentage of health care costs. Thus, even a major reduction in malpractice settlements would not lower total health care costs substantially, although it could greatly benefit some doctors.

Defensive medicine

Defensive medicine refers to tests or treatments done to protect doctors and other health care providers from being sued for malpractice. These tests and treatments may not be medically justifiable based on the person's situation. For example, a doctor may hospitalize a person even though the person could probably be effectively treated as an outpatient.

How much defensive medicine actually costs is difficult to measure. Few well-designed studies of costs have been done, and estimates from these studies vary greatly. Costs are hard to determine partly because defensive medicine is defined subjectively. That is, it is based on the doctor's judgment about whether doing a test or treatment is needed. Doctors can vary substantially and legitimately when making such a decision about a specific person's situation. Only a relatively few situations have clear and specific guidelines for testing.

Even when defensive testing is identified, determining how much money could be saved is complicated. Decreasing the amount of defensive testing involves comparing the actual costs of care with and without an extra test or treatment. These costs differ from how much people are charged and from what they are reimbursed for.

Also, whether laws to limit compensation to people suing for malpractice lowers health care costs is unclear.

Aging of the population

Although often cited as a factor (about one third of overall health care costs occur in the last year of life), the aging population is probably not responsible for recent increases in costs because many of the baby boomers have not yet reached old age. Also, more effective health care is tending to delay serious illness in older people. However, costs may be affected more as the baby boomers age. The proportion of the population over 65 is predicted to increase from about 15% in 2016 to almost 20% after 2030.

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