Health Care Costs Are Rising Faster Than Inflation

Consider how supply and demand works in the free market. If a product is made available at a particular price, interested customers buy it until it runs out. At that point, more product can be produced, but in lesser quantity for a higher price, if customers are willing to keep paying.

But what happens when money itself begins to lose value? That is happening right now, with inflation rising 2-4% every year. At this same time, heath care costs are rising by 3-5% each year, faster than inflation, creating an increasingly large gap between how much money Americans have to spend, and what it costs to receive healthcare. One analysis suggests that the since 2006, the average deductible has risen 7 times faster than average wages.

Why are costs rising? It may not be that anything unusual is happening. Medical technology is improving, hospitals and physicians need to be paid, and people are still contracting diseases that need treatment. The Journal of the American Medical Association says that the rising costs can be blamed on the increasing cost of drugs and medical hardware, with inflation being among the contributing factors for why similar equipment costs more than it did just a few years ago. None of this is abnormal, yet the costs are scaling much higher than would be expected.

It appears that one of the most expensive areas is medical technology. According to Centers for Medicare & Medicaid Services, medical technology accounts for half of spending growth in the health care industry. The issue is not that technology itself is exceedingly expensive; it is that hospitals and health care administrators have yet to figure out how best to incorporate emerging technology while keeping existing equipment that works just as well in many cases. Before better spending habits are established, there will be overspending. Even without overspending, the growing inclusion of electronic medical records in hospitals creates recurring costs through monthly subscription fees.

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To a lesser extent, experts and Americans point to the Affordable Care Act as one of the reasons why deductibles are increasing, as well as a growing number of incidents of preventable diseases resulting from tobacco and alcohol use, poor lifestyle choices and bad eating habits. Administrative costs are also a contributing factor, as is the worrying trend of for-profit hospitals that often do little to keep costs down knowing that they will be reimbursed through health insurance.

All these areas of the health care industry are entangled, so while we can point to technology spending or preventable diseases as a problem, how to reduce that spending by addressing the issues at their source remains a complex problem.