Amrit Virdee
Health care expenditure in the US has been increasing over the years for example in
1950, health expenditures accounted for only 4.6% of the gross domestic product (GDP) (Fuchs.,
2012). In 2015 the health expenditure accounted for 17.8% of the GDP or $9,990 per person
(CMS., 2017). There is also a shift in the trend in who is responsible for paying health care
expenditures, for example in 1960, 77% of health care expenditures were paid for by businesses,
households and other private sponsors whilst governments sponsored the remaining 23% (Caitlin
& Cowan., 2015). This amount changed by 2013 where the government was sponsoring 43% of
health care expenditure. The rising costs are predominantly due to increases in hospital costs,
Health care organizations (HCOs) are financially complex organizations which receive
their payments through various payment units, which is different from other business
organizations because a typical health care organization may have multiple contractual
relationships with various payers. The key distinction in paying HCOs is the payment unit of
which the five major ones include Historical cost reimbursement, Charge payment for specific
services, Fee schedules, Capitated rates and Bundled services (Cleverley & Cleverley., 2018).
As the government is becoming increasing more responsible for paying health care expenditures,
various legislative measures and in particular the Affordable Care Act (ACA) of 2010 prompted
key payment changes with the integration of quality based elements into the healthcare payment
structure. Quality based elements include the introduction of reduced payments to hospitals with
shifting risk to the provider by determining a target price for clinical episodes and reduction of
payments for hospitals that rank lowest in avoidable hospital complications (Cleverley &
Cleverley., 2018).
HISTORICAL AND CURRENT ECONOMIC 2
There are various components that affect the profitability, the ability to negotiate
reimbursement rates and efficiency of hospitals, for example there are financial differences in
HCOs that are privately or public owed as well as whether HCOs are investor-owned or not for
profit. Investor-owned hospitals generate the highest profitability (25%), followed by not-for-
profit hospitals (8%) and finally government hospitals (3%) (Turner, Broom, Elliott & Lee.,
2015). Other factors that affect profitability are whether the HCO has a teaching status, location
and critical access designation. Additional complexities include the fact that the US also has a
single payer system for patients predominantly over 65 (Medicare) and for patients below the
Health care expenses are also affected by rising drug costs primarily because drug
manufacturers are not limited to price controls and can set prices on their products in order to
recover costs (Vega, et al., 2016). The increase of drug costs is also due to Pharmacy Benefit
Managers (PBMs) and hospital markups who’s aim is to improve profits. Reimbursement rates
for drugs have also been diminishing predominantly because of PBMs that serve as middleman.
PBMs use spread pricing where they can reimburse retail pharmacies at lower rates while
charging higher prices to plan sponsors as well as differences between the maximum allowable
cost (MAC) that pharmacies can claim and the real-market prices at which pharmacies acquire
their medications.
HISTORICAL AND CURRENT ECONOMIC 2
References
Caitlin, A. C., & Cowan, C. A. (2015, November 19). History of Health Spending in the United
Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/Downloads/HistoricalNHEPaper.pdf
Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance. Burlington, MA:
CMS. (2017, June 14). NHE-Fact-Sheet. Retrieved October 28, 2017, from
https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-
reports/nationalhealthexpenddata/nhe-fact-sheet.html
Fuchs, V. (2012, March 15). Major Trends in the U.S. Health Economy since 1950. The New
Turner, J., Broom, K., Elliott, M., & Lee, J. (2015). A Decomposition of Hospital Profitability:
Vega, A. D., Meola, P. P., Barcelo, J. R., Ruiz, H. M., Oh, S. A., & Oh, T. (2016, April).
Commentary on Current Trends in Rising Drug Costs and Reimbursement Below Cost.