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Health care costs continue to rise, with Americans spending $3.5 trillion in 2017, and much of those costs have shifted from employers to employees. Unlike in other countries where health care or insurance is provided by the government, the U.S. system involves multiple players, including employers, health insurers, health care providers, consumers and the government. From basic care provided by physicians in homes in the early 1900s to the emergence of medical education, physicians practicing in hospitals and new technology, medical costs have continued to steadily climb as more people sought treatment in hospitals. Existing fire and casualty insurance companies were reluctant to offer medical coverage because they believed only those who were more likely to need medical care would seek insurance, a practice known as adverse selection. To mitigate the problem, employment-based insurance offered coverage to groups of workers, alleviating some of the financial pressure on hospitals with unpaid medical bills. Eventually, as hospital occupancy rates declined during the Great Depression, hospitals created their own prepayment plans that enabled patients to use more health care services and hospitals could control costs. During World War II and beyond, the popularity of insurance rose, as businesses could offer health benefits to workers as an incentive and the tax treatment of those benefits was favorable. Later, between the late 1940s and 1960, even as health insurance became more generous and more expensive, consumers were still insulated from health care costs, due to reimbursement systems developed by Blue Cross Blue Shield. The passage of Medicare in 1965 added even more fuel to the fire, because it reimbursed participating physicians based on a calculation of “customary, prevailing and reasonable” fees within any given geographic area. Later in 1983, Medicare switched from its cost-based reimbursement system to a system of fixed prospective payment. With most commercial insurance companies now following Medicare’s lead of predetermined fee schedules based on diagnosis, the rise of volume-based care took place. Evidence also suggests that as insurance expanded the market for health care, it generated incentives for increased development of technology. Some of this new technology represented a significant improvement over current treatments, but others did not. Now, the market is ripe with consolidation among providers and insurers, further reducing competition in the market and leading to higher costs. As a result of these trends, employers have shifted costs to employees. One common example is the implementation of high-deductible insurance plans, which increase consumers’ out-of-pocket costs. Moreover, as employer-provided health costs rise, employers are constrained in their ability to increase wages. The combination of government-provided and private health insurance, including the Affordable Care Act and Medicaid, now covers 90 percent of the population, but as long as health care providers lack competition and profit from volume-based care, it’s unlikely that costs can be constrained.

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