This is part of a series of posts on healthcare industry topics that will be discussed at the Columbia Business School Healthcare Conference on November 21. The “Payor/Provider Panel” will discuss new paradigms in medical cost and outcomes management and how these paradigms will be impacted by the election of Barack Obama.

Attempting to restrain healthcare spending in the U.S. is a bit like trying to extinguish a forest fire: while one of the smaller fires on the periphery may be easy to put out, the ones deep in the core of the forest are much more difficult to stop. Many of the propellants that have fueled national healthcare expenditures are deeply entrenched (“core”) aspects of either the healthcare system or our society’s values. As such, they have largely resisted many of the efforts made to control them.

According to the the Centers for Medicare and Medicaid Services, the share of U.S. GDP devoted to healthcare grew from 9.1% in 1980 to 16.0% in 2006. By 2016, healthcare expenditures are predicted to grow to $4.2 trillion dollars, or 20% of GDP. It is clear that it is necessary to control costs; however, the current recession will make doing so even more challenging.

Here is a cross-section of the social and logistical issues that cloud cost-cutting:

National Wealth

In spite of a potential global recession, the U.S. is likely to remain one of the wealthiest nations on earth. U.S. per capita spending on healthcare is 48% higher than that of the next highest-spending country (Norway) and 83% greater than Canada’s, according to the Organization for Economic Cooperation and Development. Princeton’s Uwe Reinhardt points out that the “ability to pay, as measured by GDP per capita, has repeatedly been shown to be one of the most important factors” driving a nation’s healthcare spending.

Administrative Costs

The U.S. healthcare financing system is very complex and entails significantly higher administrative costs than those of other countries. A study by Harvard Medical School and the Canadian Institute for Health Information estimated that approximately 31% of U.S. healthcare expenditures ($1,000 per person per year) are directed to administrative costs, about double what is spent in Canada.

System Inefficiencies

Poorly coordinated care, variations in provider practice patterns and misaligned financial incentives are just three of the inefficiencies of the U.S. healthcare system that drive up costs.

Cost of the Uninsured

A recession could force a greater number of people to live without insurance. The cost of paying for these patients when they show up at our nation’s emergency rooms is exorbitant and borne by the general public.

Cost of Technology/Resistance to Rationing

Most of the major medical technology/life science innovations over the past two decades have been priced at substantial premiums to previous technologies. In the absence of national pricing/reimbursement reform, this pricing structure will probably remain intact. The desire of Americans to always have the best doctors and the newest technologies drives up costs. Modestly intrusive practices that control the use of the most expensive treatment options, such as therapeutic substitution and step therapy, have gained some traction in the pharmaceuticals marketplace. More intrusive restrictions, such as rationing care or establishing annual cap amounts over which all care becomes out-of-pocket (a practice employed in some European countries), are much less likely to take hold. Outside of Oregon, America is probably not ready for measures as radical as rationing care.

Graying of America/Expense of End-of-Life Care

Healthcare expenses for persons over 65 are about three times those of the under-65 population, according to government data. When it comes to end-of-life care for relatives, most Americans want to keep family members alive as long as they have a “fighting chance.” Approximately 10-12% of the total national healthcare budget and 27% of the Medicare budget is spent on end-of-life care, according to the Center to Advance Palliative Care (CAPC). Like rationing, euthanasia is not likely to gain a foothold in the U.S. anytime soon, if ever. With the aging of our nation, this “core” issue will only grow in prominence. According to the U.S. Census Bureau, the percentage of the U.S. population over 65 will increase from 12% in 2006 to 20% by 2030.

What thoughts or questions do you have about healthcare spending? Please share your comments.

Photo credit: Ben Hulley