Why healthcare costs are reaching new heights

By Jules Murtha

Published February 7, 2022

Key Takeaways

More than 11% of median household incomes across the US went toward health insurance premiums and deductibles in 2020, despite federal efforts to lower healthcare costs.
While stay-home orders reduced COVID infection rates, they also contributed to significant economic losses, inflation, and job disruptions.
To combat excessive health spending, doctors can provide quality care while cutting costs by practicing value-based care.

Affordability is instrumental to individual or family access to healthcare. As of 2022, approximately 163 million people—more than half of Americans below age 65—have health insurance through their employer. This doesn’t guarantee affordable healthcare, though.

Despite legislative efforts like the Affordable Care Act (ACA), premium contributions and deductibles are rising due to the pandemic and subsequent economic changes. While legislation to support patients is a work in progress, doctors can directly mitigate healthcare costs by changing their approach to value-based care.

Cost of premiums rise over the last decade

In 2010, health insurance premiums and deductibles ate 9.1% of median household incomes. A decade later, those costs rose to 11.6%, even with the passage of the ACA.

A report published by The Commonwealth Fund notes a similar trend in employee shares. In 2010, 5.8% of income in middle-class households paid for employees’ share of premium costs. That percentage jumped to 6.9% by 2020. Within the same decade, 3.3% of income from middle-class households paid for an average deductible, which would grow to 4.7% by 2020.

Geographic influences

Geography is an influential factor. For example, while median-income households paid 10% or more of their earnings to premiums and deductibles in 37 states in 2020, Mississippi and New Mexico saw the highest payment-to-income ratios. These two states delegated between 18.1%-19.0% of their income to premiums and deductibles alone.

According to the Commonwealth Fund, greater healthcare spending is what’s driving up costs for consumers—a product, in part, of the COVID-19 pandemic.

Healthcare spending trends

While health systems and hospitals work to make healthcare more affordable, a culmination of factors have challenged these efforts in recent years.

A report published by the American Hospital Association details the financial barriers posed by COVID. On top of the strain created by an aging population, the pandemic caused health systems to spend significantly more money on resources, stemming from labor shortages and supply chain issues.

"This is the first time in 100 years we’ve emerged from an international pandemic, the effects of which are rippling through the economy, with early indicators pointing toward economy-wide inflation."

— American Hospital Association

COVID accounts for $3 billion spent on personal protection equipment (PPE), $24 billion on staffing shortages, and the projected loss of approximately $54 billion in net income in 2021. Hospitals are also expected to see long-term financial challenges associated with patients whose care had been deferred when the pandemic struck.

Other factors affecting health spending include investments in new medical technology, a growing number of insured patients, the rise in chronic conditions among Americans, and increased drug prices—all of which are compounded by COVID.

“This is the first time in 100 years we’ve emerged from an international pandemic, the effects of which are rippling through the economy, with early indicators pointing toward economy-wide inflation,” the AHA report authors wrote.

Impact of COVID-19 on the economy and labor market

And they were correct. Aside from driving up hospital costs, research shows that COVID is the culprit behind significant economic losses.

A 2021 Scientific Reports article notes that mitigation efforts to minimize transmission rates—such as stay-home orders and social distancing—reduced the labor supply in some sectors. For example, 80% of the education, management, and professional services sectors can work remotely. This is true for only 3% of the agriculture and hospitality sectors.

Even though sectors like education allow the majority of employees to work from home, most jobs in education are higher-paying than those in the agriculture and accommodation sectors. Therefore, the economy faced a greater loss from a 20% decrease in educational work due to the pandemic than it did from a 90% decrease in, say, agricultural work.

Changing labor market

COVID has also altered the US labor market. According to a Business Economics article, the US labor market faced the loss of 22 million payroll jobs between March and April of 2020. Compounding the magnitude of this loss are creeping recovery efforts, which are challenged by factors like transmission mitigation efforts and bankruptcies.

For many Americans, relief may come in the form of the embattled Build Back Better Act. Senator Joe Manchin, a key Democratic swing vote from West Virginia, recently declared the bill “dead.” While it remains to be seen whether a paired-down version of the bill will resurface, the original would have supported individuals seeking access to marketplace subsidies who normally wouldn’t be able to as a result of unaffordable employer plans. It also would have provided legal protections from harsh debt collection services.

Doctors can cut costs with value-based care

In the meantime, physicians may reduce healthcare costs by introducing value-based care to their practice.

According to the Cleveland Clinic, value-based care is a method of improving care for patients that also reduces costs. Value-based care emphasizes preventative screenings, lifestyle and dietary changes, and realistic exercise plans for patients, which minimizes expensive medications and procedures down the road.

Greater efficiency

With this approach, patients with diabetes, for example, can rely on a singular, integrated team for healthcare as opposed to jumping from one clinic to the next. Patients can then move through the healthcare system faster and with greater ease. On top of that, patients can also avoid paying for one service at a time, and instead pay in bundles.

Doctors and health systems that implement value-based care get paid based on the quality of health outcomes. The number of patients seen, procedures done, or amount charged to patients has little bearing on doctors’ income. Instead, better health outcomes—and fewer trips to the hospital or ER—are prioritized, along with affordability.

What this means for you

Healthcare costs have risen considerably over the past decade. Between the economic consequences of COVID and the rise in premiums and deductibles, patients are faced with significant financial barriers to healthcare. To increase accessibility, doctors can practice value-based care. With this approach, health systems can prioritize better health outcomes and physicians can cut costs with efficient and preventative care.

Sources

Chen J, Vullikanti A, Santos J, et al. Epidemiological and economic impact of COVID-19 in the US. Scientific Reports. 2021;11(1):20451.
Cost of Caring. American Hospital Association. 2021.
Groshen EL. COVID-19’s impact on the U.S. labor market as of September 2020. Business Economics. 2020;55(4):213-228.
State Trends in Employer Premiums and Deductibles, 2010–2020. The Commonwealth Fund. 2022.
Value-Based Care. Cleveland Clinic. 2020.