It's no surprise that Americans spend a huge amount of money on healthcare each year. High insurance premiums, high deductibles, copays, and other out-of-pocket expenses are just some of the costs associated with health and wellness in the country.

One reason for rising healthcare costs is government policy. Since the inception of Medicare and Medicaid—programs that help people without health insurance—providers have been able to increase prices.

Still, there's more to rising healthcare costs than just government policy. Read on to find out how much the U.S. spends on health costs and which factors shape prices in this industry.

Key Takeaways Healthcare costs in the U.S. have been rising for decades and are expected to keep increasing.

The U.S. spent almost $3.5 trillion on healthcare in 2017, according to a study by the American Medical Association.

The study found five factors that affect the cost of healthcare: a growing population, aging seniors, disease prevalence or incidence, medical service utilization, and service price and intensity.

Overall Costs of Healthcare

Healthcare costs have risen drastically in the U.S. over the past several decades. According to a March 2019 study published in the Journal of the American Medical Association (JAMA), healthcare spending in the U.S. rose nearly a trillion dollars between 1996 and 2015.

The study reported that healthcare spending in the U.S. during 2017 was $3.5 trillion, or about $11,000 per person. By 2027, these costs are expected to climb to $6 trillion—roughly $17,000 per person.

Where does that money go? According to the study, spending can be broken down into 11 categories:

Hospital care (32.7%)

Physician services (15.6%)

Other personal health care costs (15.1%)

Prescription drugs (9.5%)

The net cost of health insurance (6.6%)

Nursing care facilities (4.8%)

Investment spending (4.8%)

Clinical services (4.3%)

Home healthcare (2.8%)

Government public health activities (2.5%)

Government administration (1.3%)

Why Are Healthcare Costs Rising?

The JAMA study investigated how five key factors were associated with healthcare increases over time:

Population growth

Population aging

Disease prevalence or incidence

Medical service utilization

Service price and intensity

The authors found that service price and intensity, including the rising cost of pharmaceutical drugs, made up more than 50% of the increase. Other factors, which comprised the rest of the cost increase, varied by type of care and health condition.

Growing and Aging Population

Healthcare gets more expensive when the population expands—as people get older and live longer. Therefore, it’s not surprising that 50% of the increase in healthcare spending comes from increased costs for services, especially inpatient hospital care. Nor is it a shock that the two next highest factors when it comes to increased healthcare spending are population growth (23%) and population aging (12%).

Increase in Chronic Illnesses

The authors of the JAMA study point to diabetes as the medical condition responsible for the greatest increase in spending over the study period. The increased cost of diabetes medications alone was responsible for $44.4 billion of the $64.4 billion increase in costs to treat that disease.

After diabetes, conditions with the greatest increase in costs were:

Low-back and neck pain: $57.2 billion

High blood pressure: $46.6 billion

High cholesterol: $41.9 billion

Depression: $30.8 billion

Urinary disease: $30.2 billion

Osteoarthritis: $29.9 billion

Bloodstream infection: $26 billion

Falls: $26 billion

Oral disease: $25.3 billion

Increased Ambulatory Costs

Ambulatory care, including outpatient hospital services and emergency room care, increased the most of all treatment categories studied. Outpatient costs rose from an annual cost of $381.5 billion to $706.4 billion. Emergency department costs across all health conditions rose 6.4% over the same time period.

Rising Health Insurance Premiums

For most people, the rising cost of health insurance premiums lies at the center of concerns about rising healthcare costs. According to the National Conference of State Legislatures (NCSL), the average annual premium for family healthcare coverage rose nearly 5% in 2018 to $19,616.

The average increase in premium costs in 2018 for people on a private plan or a healthcare exchange was $201. The two most-cited reasons for these increases were government policy and lifestyle changes.

Government programs like Medicare and Medicaid have increased overall demand for medical services—resulting in higher prices. Also, increases in the incidence of chronic conditions like diabetes and heart disease have had a direct impact on increases in the cost of medical care. Those two diseases alone are responsible for 85% of health care costs, and almost half of all Americans have a chronic illness.

Demand for medical services has increased because of Medicare and Medicaid, resulting in higher prices.

Higher Out-of-Pocket Costs

Higher insurance premiums are only part of the picture. Americans are paying more out-of-pocket than ever before. A shift to high-deductible health plans (HDHPs) that impose out-of-pocket costs of up to $13,300 per family has added greatly to the cost of healthcare.

In fact, between 2006 and 2016, out-of-pocket costs for Americans with employer-sponsored health coverage rose faster than the costs that their insurers paid.

(These costs have risen since the study: For 2020, the out-of-pocket maximums under the Affordable Care Act are $8,150 for individuals and $16,300 for families. These limits are up from $7,900 and $15,600, respectively, for 2019.)

Inefficiency and Lack of Transparency

Thanks to a lack of transparency and underlying inefficiency, it’s difficult to know the actual cost of healthcare. Most people know the cost of care is going up, but with few details and complicated medical bills, it’s not easy to know what you're paying for.

The Wall Street Journal reported about one hospital that discovered it was charging more than $50,000 for a knee-replacement surgery that only cost between $7,300 and $10,550. If hospitals don’t know the true cost of a procedure, patients may have difficulty shopping around.

When it comes to overall transparency, a New England Journal of Medicine (NEJM) survey showed that only about 17% of care professionals believed their institutions had either “mature” or “very mature" transparency.

Patients Avoiding Care

Rising costs have created another casualty: People who skip medical care altogether. They do so not because they are afraid of doctors, but because they're afraid of the bills that come with healthcare.

A poll by the West Health Institute and NORC at the University of Chicago revealed that 44% of Americans refused to go to a doctor due to cost concerns. About 40% of those surveyed said they skipped a test or treatment for the same reason. In many cases, those who refuse treatment have medical insurance.

The Bottom Line

Each of the factors mentioned here contribute to rising healthcare costs. Increasing costs for medical services, caused by both a growing and aging population play a large role.

But so do other factors such as the growing number of people with chronic disease, increased costs for outpatient and emergency room care, higher premiums, and higher out-of-pocket costs. These factors are exacerbated by inefficiency and lack of transparency in the world of medicine.

Potential solutions include employer-sponsored wellness programs (especially those that target chronic illness), increased reliance on medical technology to remove inefficiencies, and attempts to achieve greater transparency to help lower costs. For individuals, the primary way to reduce costs is to maintain a healthy lifestyle, eat well, get plenty of activity, and stay up-to-date with your recommended health checkups and screenings.