Exploring healthcare pricing and spending is one way to understand underlying concerns that drive healthcare costs much higher than in other countries. For example, high prices can reflect rents resulting from healthcare market problems. Labor costs are a large share of total healthcare spending. These costs are driven by a variety of factors, including practice styles and the needs of patients.

Global Budgets

While price regulation may be disruptive, limiting overall spending (including prices and utilization) can lead to cost savings. In several industrialized countries, global budgets and expenditure caps are commonly used to constrain the growth of hospital and physician expenditures. While the available literature on these approaches reflects limited empirical assessment, current evidence suggests that such caps can lower inflation-adjusted hospital spending by 9-17 percent.

These caps typically apply to hospitals, though some are restricted to particular types of hospitals, such as rural or teaching facilities. Additionally, some arrangements allow providers to keep the savings they generate by coming in under budget while sharing losses that come with going over the budget.

Hospital global budgets offer a direct link between a financing source and provider, making them easier to negotiate and administer than other cost control measures that would require negotiating between the funding source and commercial insurance plans. This could facilitate broader implementation of initiatives like direct itemized healthcare pricing, rate update limits, and price caps.

Value-Based Payments

Inflating medical-cost trends are driving payers and patients to search for better value in healthcare. Traditionally, most payments have been tied to a fee-for-service model that can incentivize providers to increase service volume. Alternative payment models, including value-based payment (VBP), can change these financial incentives by linking payments to quality and cost. These arrangements can vary from pay-for-performance bonuses that reward providers for meeting a performance target to fully integrated care models that assume risk for a defined population of patients. Whether through these and other models, payers are increasingly embracing VBP. These arrangements may now comprise up to 40% of all healthcare spending. As a result, improved medical-cost management by providers in these models can support enterprise value growth.

Out-of-Pocket Payments

Out-of-pocket payments are the costs patients pay without the help of insurance or reimbursement. These payments include copayments, coinsurance, and deductibles.

In 2015, the median amount that non-elderly families paid out of pocket for healthcare was $451. Out-of-pocket spending varies substantially by family income. Families with low incomes spend less, while families in high-income groups spend more.

The Medical Expenditure Panel Survey (MEPS-HC) collects detailed data on healthcare utilization, expenditures, and insurance coverage for the entire U.S. population. It provides state-level estimates of healthcare expenses, including out-of-pocket and premium contributions. These estimates do not include monthly premiums for employer-sponsored insurance but incorporate other non-insurance medical spending types, such as cash payments for uninsured services and over-the-counter medicine.

Electronic Health Records

EHRs consolidate patients’ medical charts into digital documents that are updated in real time and instantly available to authorized providers. These digital records include details of a patient’s medical history, prescriptions, allergies, radiology images, and lab work.

EHR systems have been shown to save healthcare organizations substantial money. For example, EHRs provide tools to manage billing and insurance claims more efficiently by automating coding and eliminating many mistakes that cause rejected or denied payments. Moreover, they track electronic messages to staff, other clinicians, hospitals, and laboratories, helping to cut the costs of manual communication. However, for small physician practices, initial EHR systems can cost up to $44,000 per office and require a significant increase in staff hours at the start. This may be fine for larger organizations but will challenge smaller ones to achieve the expected savings. Internal savings from using EHRs typically come from reduced costs of obtaining and managing medications, improved utilization of diagnostic tests, and fewer billing errors.