What’s Driving Up Healthcare Costs?

A new CMS study reports healthcare expenditures substantially outpaced inflation in 2023

This week Health Affairs published a new CMS study reporting that U.S. healthcare expenditures grew 7.5% in 2023, faster than inflation at 3.6% and GDP growth at 6.6%.The Wall Street Journal attributed this disproportionate growth in costs to an increased demand for medical procedures, the high prices of popular new branded medications, care delivery labor shortages and corresponding wage pressures, and consolidation among hospitals driving up the prices of care (e.g., facility fees for outpatient care). The CMS data support all of these claims except the last one – while spending on hospital care grew 10.4% in 2023 (compared to 3.2% in 2022), the data suggests this was driven by higher utilization of hospital care rather than hospitals increasing prices faster than inflation.

1. Increased demand for medical procedures

A meaningful driver of 2023’s increased healthcare costs was the country’s historically high rate of health insurance coverage (92.5%). Unsurprisingly, more coverage resulted in more demand for medical procedures. The country’s aging population is an additional driver of care volume, given that older people tend to have more complex healthcare needs. This will come as little surprise to anyone who has been following publicly traded health insurance company stocks this year, as the biggest insurers have attributed flagging financial performance at least partly to increased care utilization in Medicare.

Putting aside cost, these factors – a more robust social safety net and increased lifespan – can be viewed as positives when considering quality of life (although there is certainly more we can do to improve healthspan to reduce suffering as we age). But there are also actions the healthcare ecosystem can take to mitigate the impact of these trends on America’s ballooning healthcare costs.

Even as care utilization increases, healthcare navigation companies can help to reduce demand for unnecessary care; route patients to lower-cost, equivalent-quality care; and contest incorrect or unfair medical bills (which is top of mind for many Americans given household spending on healthcare grew by 6.8% in 2023). Innovative startups like Sidecar Health can make a difference here – Sidecar equips its members with easily accessible data on the cost and quality of local care options and financially incentivizes them to choose higher-value (i.e., the best quality for the cost) options.

Perhaps even more powerful than navigation is providing preventive care that helps to avoid the most costly healthcare outcomes (which, coincidentally, tend to also be the worst for patients’ quality of life), such as disease exacerbations that land patients in the ER or hospital. Financial approaches such as consolidating responsibility for a patient’s total cost of care to one entity (i.e., “taking on risk”) can create a powerful incentive to invest in preventive care. A plethora of healthcare startups, including the healthcare unicorns Devoted Health and Cityblock Health, among many others, are scaling such approaches, as are the largest healthcare conglomerates like UnitedHealth Group and CVS Health. There are also plenty of companies specifically focused on optimizing elder care through reducing barriers to access, such as offering in-home care to people who are less mobile and more proactively addressing chronic diseases that disproportionately impact the elderly population.

So while some of the increase in care utilization may have been unavoidable after 2023’s spike in insurance coverage, demographic trends, and potentially some continued bounceback from lower care utilization trends during the height of the COVID-19 pandemic, there are still things we can do to manage these going forward.

2. High prices of branded medications

It’s well-known that legislators, healthcare insurers, and employers on the hook for healthcare costs are concerned about the financial burden of GLP-1s. This is understandable considering these drugs’ high prices, broad applicability across the population, and increasing data supporting their efficacy in treating more and more diseases. While the launches of other branded medications have undoubtedly also contributed to rising medication costs, the Health Affairs article obliquely references GLP-1s in its focus on “growth in spending for antidiabetic drugs” as a key cost driver across both Medicare and Medicaid.

The impact of GLP-1s has been more explicitly called out by many publicly traded companies, such as the comment that “new branded market entrants, call them GLP-1s, have further contributed to increased pharmacy costs” in CVS’s 2023 investor day. Companies like CVS (owner of insurance company Aetna and pharmacy benefit manager CVS Caremark) are aggressively trying to manage these cost impacts to their customers (e.g., employers, Medicare, Medicaid). CVS’s newly appointed CEO, David Joyner, commented in the same investor day meeting that “if you combine both the purchasing and formulary services that we [at CVS Caremark] provide on top of the utilization management, we've been able to take 70% of the cost out for this GLP-1 category.” It’s likely that those on the hook financially for expensive medications like GLP-1s will continue seeking ways to minimize their utilization and price.

3. Labor shortages

After many care providers’ harrowing experiences working through the intense early days of COVID-19, the broader challenges of working in care delivery have become much more well-known societally – as has the resulting shortages of care providers across specialties and licensures. Ask virtually any healthcare executive overseeing the delivery of care and they’ll cite staffing as one of their biggest challenges. While the Health Affairs report barely mentions labor shortages and corresponding wage pressures, it does attribute part of the acceleration in Medicaid expenditures to “provider rate or cost increases.” Taking on this challenge is one of the buzziest areas in healthcare innovation today, with the availability of increasingly sophisticated AI models showing promise to automate away some of the most labor-intensive, burdensome tasks. Other approaches to the labor shortage have included sourcing skilled labor, such as nurses, from abroad.

4. Increasing prices?

The CMS study doesn’t suggest that prices increased disproportionately for the same healthcare services from 2022 to 2023. According to the report, “Health care prices, as measured by the National Health Expenditure deflator, grew 3.0 percent in 2023…. Economywide inflation, as measured by the GDP price index, grew 3.6 percent in 2023. ”Given that health care price growth didn’t outpace overall inflation, the report concludes that “The acceleration in health care spending growth (from 4.6 percent in 2022 to 7.5 percent in 2023) reflected growth in nonprice factors such as the use and intensity of services.” This may seem a bit surprising given the narrative around hospital consolidation and price gouging – but even if this is true, the report suggests that in 2023, prices didn’t increase more than they did in previous years.

In light of the trends discussed here, the CMS report doesn’t expect U.S. healthcare costs to moderate anytime soon. Still, I’m hopeful that the innovation coming from the healthcare startup ecosystem and responsiveness from the biggest healthcare companies can help steer us in the right direction.