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Healthcare costs are up. Here are the culprits.

By David R. Francis / December 15, 2003



It is no secret to Americans that healthcare costs are soaring. But some of the causes of this escalation are startling. For example:

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• Drug companies spend roughly as much on advertising and promotion - $20 billion a year - as they do on research and development of new drugs.

• Overall, American pharmaceutical firms employ one sales person for every physician in the country. They also pick up the tab for doctors to attend seminars promoting their products, which happen to take place in desirable locations, such as Florida and the Caribbean.

• New technology - from diagnostic devices to surgical techniques - accounts for more than half the rise in total healthcare spending in the past three years, says Andrew Tilton, an economist at Goldman Sachs, an investment bank in New York.

• Despite rising costs, profit margins on healthcare products and services, including health insurance, have been going up - rapidly - rather than down. Mr. Tilton says mergers have increased providers' pricing power.

Even before the new Medicare law extending prescription-drug benefits, experts had forecast higher costs ahead. The rising cost of healthcare affects all Americans, whether or not they make much use of the medical system. It means they have less to spend elsewhere.

"[Soaring US costs] just can't go on much longer," says Paul Ginsburg, president of the Center for Studying Health System Change (HSC) in Washington, D.C. "Things will happen."

The latest cost numbers indicate the growing economic challenge.

Already the nation is spending about $1.65 trillion a year on healthcare. That represents 15 percent of gross domestic product, the total output of goods and services. It consumes one-fourth of the federal budget, more than defense.

By comparison, Canada spends about 10 percent of GDP on a universal, government-run healthcare system. Further, Canadians live a bit longer on average than Americans. That suggests lower costs haven't damaged the health of Canadians.

Outpacing inflation

Surveying nearly 3,000 employers, Mercer Human Resource Consulting finds that their health-benefit costs rose 10.1 percent this year, while inflation hovered around 2 percent. (See chart.)

The cost increase is less than the nearly 15 percent rise in 2002. But it still means that costs for each active employee, including all medical and dental plans offered, rose from $5,645 in 2002 to $6,215 in 2003.

Using a broader database that covers individual costs as well, the Center for Studying Health System Change (HSC) in Washington, reckons that healthcare expenses per privately insured American slowed in the first half of 2003 to a 8.5 percent increase from a 10 percent rise in the second half of 2002. That includes hospital inpatient and outpatient services, physicians, and - rising fastest of all in recent years - prescription-drug costs.

As costs spiral upward, more and more Americans are being priced out of the healthcare market.

Rising number of uninsured
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