The Health Care Cost-Coverage Conundrum

In 2003, Paul B. Ginsburg and Len M. Nichols of the Center for Studying Health System Change (HSC) published an annual essay that cut through the usual talking points about American health care to confront a problem that policymakers had spent decades avoiding: the country was spending far more on medical care than it could sustain, yet tens of millions of people still lacked coverage. The essay argued that until political and corporate leaders were willing to acknowledge the need for genuine trade-offs -- between the care Americans wanted and the care the nation could afford -- the cost-coverage problem would only get worse.

The Core Problem: Spending Outpaces Income

After a brief period of slower growth during the height of tightly managed care in the mid-1990s, health care costs had resumed climbing well ahead of incomes. An HSC study showed that costs underlying private health insurance rose 9.6 percent per capita in 2002, while GDP grew only 2.7 percent per capita. Employer-sponsored insurance premiums were increasing even faster -- 14 percent on average in 2003 -- with another round of double-digit hikes projected for 2004.

This gap between health spending growth and income growth was not new. Over the preceding 30 years, personal health care spending in the United States had consistently outpaced GDP by roughly 2.5 percentage points annually. Health care's share of GDP had more than doubled during that period. And the problem was not uniquely American -- all developed countries were devoting growing shares of their economies to health care, according to the Organization for Economic Cooperation and Development (OECD). But the United States spent considerably more per person than any other industrialized nation, making the affordability challenge especially acute.

Why American Health Care Costs So Much

Ginsburg and Nichols identified several structural factors driving high costs. Chief among them was the way health care was financed. Unlike other forms of insurance -- life insurance or fire insurance, where the triggering event is clear-cut -- health insurance obligations were defined by whatever treatments physicians and patients chose to pursue. When someone else was footing the bill, patients had minimal incentive to weigh costs against clinical value. This insulation from the true price of care encouraged overutilization and made cost control extremely difficult.

Compounding this was a severe shortage of information about the comparative effectiveness of medical tests and procedures. Private markets produced little of this research because effectiveness data, once public, benefited everyone regardless of who paid for it. Government funding for effectiveness research was surprisingly thin, given the enormous financial stakes for public and private payers. Providers and medical technology developers had proven more effective politically than advocates of systematic technology assessment, keeping the research agenda small.

A recent analysis had concluded that the United States actually used health services at lower rates than other OECD countries, and that higher prices and greater service intensity -- not more frequent doctor visits -- explained most of the spending gap. In other words, Americans were not seeing the doctor more often; they were paying more per encounter and receiving more resource-intensive care when they did.

Technology as a Cost Driver

Much of the long-term upward trend in per-capita health spending was driven by technological change -- new diagnostic tests, new treatments, and expanded applications of existing technologies. But the rapid spread of new medical technology would not have been possible without a financing system that covered most costs and maintained few mechanisms to evaluate new techniques and devices for clinical effectiveness before granting coverage. The result was a medical marketplace where expensive innovations diffused quickly, regardless of whether they produced outcomes significantly better than existing approaches.

Meanwhile, hospitals and physicians were capitalizing on the retreat from managed care to push for higher payment rates and invest in lucrative specialty services -- particularly cardiac, cancer, and orthopedic care. Medical groups were opening ambulatory surgery centers, expanding diagnostic imaging capacity, and competing aggressively for high-margin procedures. This specialty arms race suggested that payment policies were inadvertently overvaluing some services while undervaluing others, warping the competitive landscape.

The Cyclical Problem of Employer Response

Employers' willingness to tackle health care costs followed a predictable cycle tied to the broader economy. When costs were rising fast, profits were thin, and the labor market was loose, employers took strong action -- most notably the move to restrictive managed care in the early 1990s. But when the economy improved and worker recruitment became more pressing than cost control, those efforts were abandoned. The late-1990s boom saw employers retreat in the face of employee complaints about limited provider choice, allowing costs to resume their upward climb.

By 2003, with premiums surging again and the economy weaker, employers were responding by increasing patient cost sharing -- raising deductibles, copayments, and coinsurance. But they were not interested in returning to restrictive managed care models, and they were not optimistic that higher cost sharing alone would produce lasting relief. The cycle seemed destined to repeat.

Government's Limited Toolkit

Federal and state governments confronted costs through two roles: as managers of public insurance programs and as regulators. Medicare and Medicaid had periodically controlled spending by reducing provider payment rates, but those reductions were constrained by worries about beneficiaries' access to care and providers' financial stability. Benefit cuts in public programs were uncommon, though fiscal constraints likely explained why Medicare never added a prescription drug benefit in the 1970s when such coverage became standard in private insurance. Governments had been reluctant to manage utilization directly, partly due to statutory restrictions on interfering with the practice of medicine.

Regulatory approaches had fared unevenly. Hospital rate regulation, adopted by several states in the 1970s and proposed at the federal level by President Jimmy Carter, showed some effectiveness but was mostly abandoned in the 1990s when Medicare prospective payment and managed care contracting were seen as adequate constraints. Certificate-of-need legislation -- which required hospitals to justify major capital expenditures -- persisted in many states but research showed it had limited aggregate impact on spending, though it did influence which institutions expanded.

The Rationing Imperative

Ginsburg and Nichols made the case that health care rationing was already happening in America -- it was just happening through the blunt instrument of insurance coverage rather than through clinical judgment. The uninsured received substantially less care than the insured and had worse health outcomes. The insured with ample resources received more care than lower-income insured people, but without clear differences in results. The challenge was to move toward a more efficient and equitable form of rationing -- one guided by evidence about which services delivered genuine clinical value.

The authors acknowledged major gaps in the knowledge needed to implement such an approach. Estimates of the fraction of physician care decisions supported by clear clinical trial evidence ranged widely -- from 11 percent to 65 percent, depending on specialty and setting. Evidence-based practice guidelines, chronic disease management programs, and comparative quality information systems were all in early stages. But waiting for perfect information was itself a costly choice, and the authors argued that massive public investment in developing these tools was long overdue.

Three Imperatives for Progress

The essay distilled the cost-coverage problem into three essential points. First, cost containment and quality improvement were inseparable -- Americans needed better value from the $1.4 trillion being spent annually on health care. Second, universal coverage required difficult choices about what would be covered; not every service of marginal benefit could be included. Third, even with slower cost growth, significant public funding would be needed to extend coverage to the estimated 43.6 million uninsured, whether through tax subsidies, expanded public programs, or some combination.

Ginsburg and Nichols proposed a framework more compatible with American values than the centralized resource limits used in other OECD countries. Rather than declaring certain services unavailable, the system could use evidence-based practice guidelines and technology assessment to inform benefit design and create differential cost-sharing requirements. Patients would retain broad choices, but services with limited demonstrated clinical value would carry higher out-of-pocket costs, while highly effective services would be available at lower cost. The authors also noted that lower-income workers were being denied access to the more restrictive but affordable managed care products that could serve them well, because higher-income employees had rejected those products' limitations on provider choice.

The essay concluded with a call for leadership across political parties, professions, and sectors. Until leaders at every level were willing to articulate the need to confront trade-offs among clinical effectiveness, cost, and equity, the health care system would continue pricing coverage out of reach for growing numbers of Americans. The result would be a society spending more and more on medical care while distributing its benefits less and less equitably.

Sources and Further Reading

CMS — National Health Expenditure Data — Official data on U.S. health spending trends.

Kaiser Family Foundation — Health Costs — Analysis of health care costs and spending.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care costs and system performance.