Health Care Costs are Concentrated on a Few Patients

August 14th, 2012
in econ_news, syndication

bandages-and-crutchesSMALLEconintersect:  The National Institute for Health Care Management Foundation (NIHCM) has published a report entitled "The Concentration of Health Care Spending".  A key finding of this study is that most of the health care costs in the U.S. are accrued by a very small group of people.  We are not talking about the often discussed fact that people in their last year of life consume an inordinate amount of medical services compared to everyone else, although that may be contributing to the study results .  This study found that 5% of the U.S. population is consuming approximately half of the health care in the U.S., measured in dollars.

Follow up:

Here are the key points listed by the authors in the introduction to their executive summary:

  • Spending for health care services is highly concentrated among a small proportion of people with very high use. Conversely, a significant portion of the population has very low health care spending.
  • People who are older or who have one or more chronic medical conditions or functional limitations are significantly more likely to be among the highest spending patients.
  • High spending persists over multiple years for many patients, while others return to more normal spending levels after an expensive episode. There is also evidence that high spending occurs near the end of life for many patients, particularly within the Medicare population
  • Targeting the highest spenders represents the greatest opportunity to have a significant impact on overall spending, but implementation of strategies directed at high spenders is challenging for a number of reasons.
  • The concentration of health spending also has important implications for health policies related to acceptance of and compensation for differential risks.

Here is a key graph from the report:

Click on graph for larger image.

The top 1% consume more health care than do the bottom 82% and more than 7.6 times the bottom 50%.

The top 5% consume more than 17 times the bottom 50%.

Is it any wonder that many in the bottom 50% of health care consumption object to mandatory health care plans?

The study also found that the concentration of health care costs occurred in studies of Medicare data only.  But the actual concentrations were less for Medicare than in the total population study.  This implies that end-of-life health care is not the only factor producing the concentration of costs because a greater concentration would be expected from that source (end-of-life) for seniors (Medicare patients) than for the general population.

Editor's note: This data suggests that the proper approach to health care with potential for cost reductions could come from one of two extremes:

  • Single payer universal health care; or
  • Mandatory catastrophic health care insurance which would have everybody required to pay premiums for protection against a health catastrophe (say top 5% expense level) with individuals choosing how to cover all other health care through whatever means they chose.  This could include purchased insurance (individually or employer provided) or self-insured (going exposed).

The report indicates that the top 5% level had an expenditure about $40,000 per capita per year for 2009.  Using that number and assuming a 10% administrative cost, the catastrophic coverage would have an annual premium of about $2,300 per capita per year.  This could be reduced for all individuals who satisfied certain health maintenance requirements each year, verified by government paid doctors' check-ups and health care counseling.  Some sort of assistance would have to be provided for those with low incomes, possibly offset by reduced Medicaid costs.

John Lounsbury


  • Last Year of Life Study (Steve Calfo, Jonathan Smith and mark Zezza, Centers for Medicare & Medicaid Services, Office of the Actuary)

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  1. Isaac says :

    Important review. In your editors note you indicate that one of two solutions would be a single payer universal system. I would argue that we already have that for those over 65 (Medicare), and it is ineffective at dealing with this problem.
    For a single payer system to be effective at addressing this issue, it must implement a thoughtful rationing protocol, one that denies certain less effective services (less effective from a public health cost-effectiveness standpoint). For example, having a policy of no dialysis for those over 70 years old (unless paid for with personal monies or insurance).
    The problem is that the elderly are dead set against any restraint, and they make up a huge and growing voting block.
    The result is hip joint replacements for all, and huge student debt for the young.
    Bottom line, we need intelligent rationing, or we go broke.

  2. Tim says :

    Great article. With all the brewhaha re Obamacare, it's nice to see some data as to where the healthcare money is actually spent. Combine this with the New Yorker article from a few years ago on doctors incentives and some insights jump off the page.

    I agree with Isaac above that single payer is advantageous only because it makes rationing easier.

    Mandatory catastrophic insurance is the way to go. I compare it with car insurance and car maintenance. Do I need collision coverage to help with an oil change or belt / hose replacement? The problem with paying cash for routine health expenses is that the health insurance company contracts with providers are the only way to get reasonable prices. It's especially acute for lab tests where my local labs charge $120 for a test and discount it to $10 under contract. I've heard that insurance companies with go after providers that charge contract prices to patients without insurance, which is disturbing.

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