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Healthcare Spending – Few Incur the Most in Claims

A country’s distribution of wealth can be eerily similar to its distribution of healthcare spending. For example, a larger portion of wealth of any society is owned by a small percentage of the people in that society. Likewise, the preponderance of healthcare spending comes from a small percentage of people with multiple chronic conditions.

Vilfredo Pareto, an Italian civil engineer, economist and sociologist, termed the distribution of wealth, now known as the Pareto principle, as the “80/20 rule” – of which 20 percent of the population controls 80 percent of the wealth (some caveats apply, but you get the gist of this concept).

Let’s take a look at healthcare spending in our country. Most recently, the National Institute for Health Care Management (NIHCM) released a series of charts that provides a great deal of insight on how a few Americans can greatly impact overall healthcare spending. This insight, of course, is nothing new, yet the slides have been updated, using data from the 2014 Medical Expenditure Panel Survey.

The chart below provides a bird’s eye view of American’s spending distribution in 2014. In that year, the top 10 percent of healthcare spenders accounted for two-thirds of all spending. In healthcare, Pareto’s 80/20 rule might need to be adjusted to the “90/10 rule.” Digging deeper, the top five percent of spenders comprised half of all spending, while only one percent of spenders made up more than one-fifth of all spending.

In a country that spent roughly $3 trillion on healthcare in 2014, about $2 trillion was spent by 10 percent of all spenders and $600 billion was spent by just one percent of healthcare spenders. On the backside, the bottom 50 percent of spenders account for only three percent of spending – quite amazing, right?

In the chart below, the bottom 90 percent of the “Civilian Non-Institutionalized Population” paid $1,500 or less in out-of-pocket costs in 2014, while the top one percent of the distribution had out-of-pocket costs in excess of $6,100, and their mean spending burden was estimated to be nearly $11,000.

Over the past decade (2006-2015), spending for personal healthcare services increased by more than $2,400 per person – roughly a 40 percent increase. Higher spending was observed in all six sectors during this time, with hospital care leading the way:

  • Hospital Care48 percent
  • Home Health & Other LTC Facilities and Services41 percent
  • Physician and Clinical Services35 percent
  • Retail Prescription Drugs34 percent
  • Dental and Other Professional Services30 percent
  • Retail Durable Medical Equipment & Other Medical Products28 percent

Yes, prescription drug costs continue to attract a great deal of media air time concerning price inflation., But it’s hospitals, physician and clinical services and home health that grew more than retail prescriptions over this same time period.

The following chart illustrates the steady increase in per-capita spending for most types of services – such as hospital care, home health and other long-term care, and physician and clinical services. However, retail prescription drugs increased most rapidly from 2013 to 2015, warranting public scrutiny.

Aggregate national spending on personal healthcare services has risen by over 50 percent over the period 2006-2015. Public and private payers are spending more in total, in addition to patients personally paying more (out-of-pocket).

Despite more Americans having high-deductible health plans, other payers (e.g. Medicaid, Medicare and Private Insurance) continue to pay a higher share of the cost.

As health costs continue to increase, the share of total health spending by patient or family has actually decreased (see below).

What do these charts suggest? Healthcare continues to be highly concentrated (few spenders incur the most in claims), costs for all major types of care continue to increase more than we would like, and the spending of the public and private plans continue to outpace the out-of-pocket costs that individuals are required to pay. Finally, personal healthcare spending accounts for a greater portion of the median personal income (see below).

Despite the implications of the above data, recent House and Senate activity in Washington fails to address the source of the cost issue. Much of the ‘healthcare’ debate is about the individual insurance markets, including how to fund Medicaid. What we need is to have an honest, public debate about the relative costs and worth of healthcare – also known as ‘value.’ Currently, we reward volume, not value, in how we pay for the care we receive. The incentives and disincentives we use to ‘reward’ the players in healthcare determine both intentional and unintentional consequences. Because of this, our healthcare ‘system’ is merely performing as haphazardly designed. Let’s solve the individual market and move on.

Perhaps as we move forward, progress will be possible when politicians set aside ideology and focus on pragmatic solutions that put consumers first. That should be our collective hope.

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