Healthcare costs are up. Here are the culprits.

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

• 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.

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• 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

The latest statistics show 44 million Americans are not covered by any health insurance. This number is likely to increase as costs rise further.

Higher costs discourage employers, especially small businesses, from providing health benefits to employees. And since employers are already boosting the cost to employees of health benefits, fewer workers will enroll in their firms' health plans.

In smaller companies, only 48 percent of employees elect family coverage, down from 51 percent in 2002. The $359 average monthly bill for HMO coverage is just too much for many, and it's getting worse.

The Mercer survey found that employee contributions, especially for family coverage, rose sharply in 2003. In the three previous years, employers had passed on to employees only a portion of cost increases. This year, "employers took back the lost ground," says Mercer consultant Blaine Bos.

Critics say the new Medicare drug benefit will tempt more companies to drop their coverage of retirees, despite new subsidies to encourage continuation. The benefit, though primarily shifting drug costs from individuals to the federal government, is expected to add to overall drug consumption.

The cost of bringing a single new drug to market has risen to about $1.7 billion, calculates Bain & Co., a Boston consulting firm. That's up from $1.1 billion from 1995 to 2000. These totals involve commercialization costs, such as preparing marketing materials.

Marketing that informs?

Drug companies defend their marketing expenses as educational, saying doctors have little spare time to inform themselves of the latest advances.

But "nobody wants to be educated by somebody who wants to sell them something," says Arthur Caplan, a bioethicist at the University of Pennsylvania. He calls the seminars "small-scale bribery."

What's to be done about rising medical costs? Here are some suggestions by experts, not all politically easy to obtain:

• Provide more information to consumers on what drug works, what procedures are best, which hospitals and physicians have good records. Insurance, for instance, shouldn't cover extra costs if a patient uses a brand-name drug when a cheaper generic does the job.

• Cut off expensive treatment if it extends someone's life only a few days or months.

• Spend more on prevention of disease by encouraging better lifestyles, improved nutrition, and other steps.

• Ban or control the advertising of prescription drugs to consumers. The "hype" in the ads that pepper the evening news and other programs has swelled drug sales and taken up physicians' time, suggests Mr. Caplan. But there is little indication that the extra drug consumption has improved health by much.

• Cap malpractice awards so doctors need not prescribe so many tests and other defensive practices.

• Let HMOs and other healthcare providers return to tighter management of costs, procedures that worked in the 1990s but were abandoned after severe criticism by customers and the press.

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