What are the Primary Drivers of Healthcare Costs?

The United States healthcare system is the most expensive in the world, reaching $3.5 trillion in 2017 ($10,739 per person) and comprising 17.9% of the country’s gross domestic product (GDP). Expected to reach 19.7% GDP (or $5.7 trillion) by 2026, healthcare costs are reaching unsustainable levels, jeopardizing America’s international competitiveness, burdening U.S. families, and weakening the economy at the federal and state levels. The factors driving healthcare costs are numerous, multifaceted, interconnected, evolving, and often fluctuating in their unique impact during any given time period. In addition, many factors vary by region and state, and some are just fundamentally inherent. This article does not try to solve the cost dilemma, but merely articulate the current data regarding healthcare spending and the underlying drivers of healthcare costs.

Why Are We Spending More?

Population Growth and Aging

According to a 2017 study in the Journal of the American Medical Association (JAMA), healthcare spending increased by $933.5 billion from 1996 to 2013. The study looked at five factors that drive healthcare spending: population growth, population aging, disease prevalence or incidence, service utilization, and service price and intensity. As expected, population growth and aging were found to be significant factors driving healthcare spending. The increase in the United States population from 1996 to 2013 accounted for a 23.1% increase in spending, amounting to $269.5 billion. Aging accounted for an 11.6% increase, totaling $135.7 billion. The JAMA study revealed that the U.S. is simply spending more money on more people, due to population growth and due to the fact that more people are qualifying for Medicare and Medicaid, two of the U.S.’s major payers in healthcare spending.

In 2017, 57.6 million people were enrolled in Medicare. That number is expected to increase to 73.7 million people by 2026. Additionally, 72.7 million people were on Medicaid in 2017, and that figure is expected to rise to 81.3 million by 2026 (CMS). The fundamental reality of population growth means that more money will be spent on health care for more people, and as Americans live longer, getting older and sicker, healthcare spending will continue to rise.

Price and Intensity

In addition to population growth and aging, the JAMA study also revealed that the primary driver of healthcare spending from 1996-2013 resulted from pricing and intensity increases, which resulted in a 50% increase in spending, totaling $583.5 billion. Simply put, Americans were charged more for their healthcare products and services, and they experienced an increase in the amount of technically complex, advanced services to address care needs.

Ongoing data confirms that the United States continues to pay higher prices for healthcare products and services than any other country in the world, and as the intensity of care increases, so do overall costs. George Isham, MD, Senior Advisor at HealthPartners, Inc., offers a strong response to higher prices arguing that “price is two-thirds of the reason we spend more in this nation than any other nation. We need to start characterizing this as price gouging. We need a new ethic for healthcare financial management. We need to get rid of personal, institutionalized, legitimatized greed” (NRHI). Experts agree that addressing price is a fundamental starting point if the U.S. hopes to get healthcare costs under control, but doing so is a formidable task, because the underlying components driving price are complex and numerous.

Expected to reach 19.7% GDP (or $5.7 trillion) by 2026, healthcare costs are reaching unsustainable levels, jeopardizing America’s international competitiveness, burdening U.S. families, and weakening the economy at the federal and state levels

What’s driving up the cost of health care?

In 2012, the Bipartisan Policy Center (BPC), founded by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell, created the Health Care Cost Containment Initiative to “explore and evaluate strategies to contain health care cost growth on a system-wide basis, while enhancing health care quality and value.” The BPC commissioned a study titled, “What is Driving U.S. Health Care Spending?: America’s Unsustainable Health Care Cost Growth.” Primarily authored by Dr. Paul Ginsburg, this background paper gives an exceptional overview of the drivers of healthcare cost growth, noting that “at a basic level, health spending is a product of the price of health care services and the utilization of those services.” Subsequently, the paper focuses on identifying and analyzing the underlying or correlating factors that drive price and utilization, giving a comprehensive list and overview of these components and how they impact overall healthcare spending in the U.S. This inventory is worth noting because it reveals the multitude of issues driving price and utilization and the complexity in trying to address and solve each aspect of the healthcare spending crisis.

Drivers of Price and Utilization

(Summaries are taken from the Ginsberg, et.al. paper, “What is Driving U.S. Health Care Spending?: America’s Unsustainable Health Care Cost Growth.” September 2012.)

Healthcare Finance and Delivery

  • Fee-for-service reimbursement—reimbursement under the fee-for-service (FFS) model generates a strong incentive to perform a high volume of tests and services, regardless of whether those services improve quality or contribute to a broader effort to manage care.
  • Fragmentation of care delivery—providers are paid for volume rather than patient outcomes, generating little financial incentive to coordinate with others to deliver more efficient care.
  • Administrative burden (on providers, payers and patients)—our complex system of payment and delivery leads to increased paperwork and the need for greater administrative resources, raising provider and payer costs.

Population Needs for Care

  • Aging—the aging of the population will have a significant impact on health care spending growth.
  • Chronic disease (rising rates of chronic disease and co-morbidities, as well as lifestyle factors and personal health choices)—the rapidly increasing number of individuals with chronic disease accounts for a disproportionate percentage of overall health spending.

Advancing Medical Technology

  • Advances in medical technology can both increase health system efficiency and encourage unnecessary utilization of expensive treatments in FFS.

Insurance Design

  • Tax treatment of health insurance—the employer-sponsored health insurance tax exclusion encourages increasingly generous benefit designs and represents a significant loss in revenue for the federal government.
  • Utilization and prevention—access to health care services with little cost-sharing encourages higher care utilization and leads to increased spending.

Lack of Transparency in Cost and Quality Information

  • Limited consensus on standards of care (lack of transparency about cost and quality, compounded by limited data, to inform consumer choice)—without reliable information that enables a fair comparison of health care quality and outcomes, patients and clinicians are ill-equipped to utilize the best, most cost-effective treatments.
  • Cultural and Institutional influences (biases that influence care utilization)—cultural biases often favor more and prolonged care, regardless of its effectiveness.

Competition and Consolidation

  • Choice and Market Forces (changing trends in health care market consolidation and competition for providers and insurers)—imbalances in market power due to regional variation as well as increasing provider and payer consolidation hinder market forces from limiting high prices.
  • Provider consolidation—growing consolidation among providers can improve the delivery of care, but misuse of market power to increase the price of services is a risk.
  • Insurance consolidation—larger insurers are gaining market share across the nation. Potentially, insurers could use this power to negotiate lower provider reimbursement.
  • Unit prices (high unit prices of medical services)—the U.S. pays higher prices for health services, which leads to higher spending.

Legal and Regulatory Environment

  • Legal barriers—the current U.S. legal and regulatory environment drives up costs to our health care system by preventing transition to more cost- effective systems of care.
  • Medical malpractice—fearing malpractice lawsuits, many physicians significantly drive up costs to our health care system by ordering unnecessary tests and treatments.
  • Fraud and abuse contribute to wasteful spending in both federal and private sector health programs.

Health Professional Workforce

  • Scope of practice restrictions—utilizing a physician for a service that another professional is able to effectively and safely provide is a missed opportunity to utilize a lower cost provider.
  • Health professional workforce shortages—shortages or maldistribution of health professionals can drive patients to seek care from higher cost providers.
  • Clinical specialization—the high ratio of specialty physicians in the U.S. can encourage utilization of higher cost services.
  • Medicare and Medicaid participation—patients that cannot regularly access care via a physician office visit may seek treatment from higher cost providers, such as hospital emergency departments.

Most U.S. healthcare spending is influenced by population growth and aging, price and intensity; however, it’s the underlying components of price that are the key drivers of rising healthcare costs. These issues are substantial, complex, and daunting. From payment reform to advances in technology, medical malpractice to fraud and abuse, fragmented care to provider consolidation, the underlying factors driving price are a complicated, interconnected framework of issues that, if unsolved, set the U.S. healthcare system on a path to unsustainability.


North Texas Clinically Integrated Network, Inc. (dba TXCIN) is a non-profit ACO that began in late 2014. A small group of health care, independent physicians aligned to initiate clinical integration and value-based contracting. Partnering with RevelationMD and its state-of-the art information platform, TXCIN has become one of the largest, independent networks of physicians in North Texas.


Centers for Medicare and Medicaid Services. “National Health Care Expenditures 2017 Highlights.” CMS.gov. Retrieved February 15th, 2019.


Centers for Medicare and Medicaid Services. “National Health Expenditure Projections: 2017-2026.” Office of the Actuary. CMS.gov. February 14th, 2018. Retrieved February 15th, 2019.


Dieleman, PhD, Joseph L., et. al. “Factors Associated with Increases in US Health Care Spending, 1996-2013.” JAMA. Volume 318, Number 17. November 7th, 2017. Retrieved February 15th, 2019.


Ginsberg, Dr. Paul, et. al. “What is Driving U.S. Health Care Spending?: America’s Unsustainable Health Care Cost Growth.” Bipartisan Policy Center. September 20th, 2012. Retrieved February 15th, 2019.


NRHI. “The National Affordability Summit: Getting to Affordability.” Network for Regional Healthcare Improvement. September 27th, 2017. Retrieved February 15th, 2019.



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