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Health costs swamping U.S. economy

Escalating U.S. health care costs impoverish families, hurt the economy,  and  force government into agonizing choices.  Recent studies indicate the continued rise in spending is unsustainable, putting lawmakers and under increasing pressure to fix the system. By CNBC's Rob Reyn0lds.
/ Source: CNBC

Jeanie Keenan and her family are drowning in a sea of medical expenses.

“I’ll tell you now, the way the medical is going and the insurance is going, the high rise of it,  there’s going to be a lot more people in my situation,” she said. “A lot more.”

Two of her seven children have severe asthma. Her husband, a construction worker, has been in and out of work with back and knee injuries. And Jeanie herself has heart and lung diseases.

Even though they have health insurance, this Hampstead, Maryland  family owes $30,000 in medical bills. The Keenan’s credit rating is ruined; they've filed for  bankruptcy. She's afraid of what may be next.

“It would be very hard for us … to go ahead and lose the house,” Keenan said.

Keenan is the human face of a staggering national problem. shows half of all personal bankruptcies are caused by medical expenses.

“The middle class is in trouble in the health care system in this country. It’s not just the uninsured," said Harvard Medical School professor Dr. David Himmelstein, a cofounder of Physicians for a National Health Program and lead author of the study.

Escalating health care costs impoverish families, hurt the economy, and force government into agonizing choices.

Since 1990, medical spending soared from $696 billion to a projected $1.7 trillion dollars last year. That’s 15 percent of the Gross Domestic Product.

“Health care is going up at such a rate, that it’s going to reach the point — and we think its already reached the point — where it’s an unsustainable situation,” Patricia Schoeni, executive director of the National Coalition on Health Care.

If current trends continue, the Medicare hospitalization trust fund will run out in 2019 — much sooner than the Social Security trust fund.

The new Medicare prescription drug benefit will cost close to $1 trillion dollars — far more than the Bush administration originally predicted.

And Medicaid, the federal-state health program for 50 million impoverished Americans, has already decimated state budgets. Last month, Tennessee dropped 323,000 adults from Medicaid rolls, and Missouri plans to cut 89,000.

“States right now are making the toughest choices — often looking at grandparents fighting for health concerns with their grandchildren,” said Kansas Democratic governor Kathleen Sibelius. “That’s not a great place to be.”

Behind the increase: advances in medical technology, new drugs, and an aging population requiring more care. 

“We're looking at Medicare and Medicaid doubling as a share of GDP by 2020 — and doubling again by 2040,” said Henry J. Aaron, a senior fellow at the Brookings Institution. “The implications of those trends for higher taxes of enormous cuts elsewhere in the federal budget or both, are so severe that something’s got to give.”

Back in Maryland, Jeanie Keenan just hopes she can save her home.

“And my kids can stay where they're at and be happy and develop,” she said. “And not worry, ‘Mom, is this the day we are going to be thrown out?’”

But individuals aren’t the only ones struggling with the crushing burden of health care costs.

At the Trolley Car Diner in Philadelphia, the high cost of health insurance has put the workers and their boss in a painful predicament, according to owner Ken Weinstein.

“When we first got into business 10 years ago, we were able to offer all our hourly employees a reasonable health insurance plan that costs $60 a month,” he said. “We can no longer do that.”

Today, that low-cost plan no longer exists. Now, insuring the same employees costs over $350 a month. Weinstein can’t afford it, so most of his 55 employees go without.

“It's terrible,” he said. “It's hard to watch people have to leave their health care insurance and try to make do without having it.”

In 2001, the average annual premiums for employer-sponsored family coverage came to $7,053. Two years later, that cost had risen to $9,068. This year, it’s projected to hit $12,485, according to the

Those surging premiums for health care insurance bleed profits from businesses large and small.

“This is at the top of every CEO's ... every business owner's short list of biggest challenges facing their companies.” said Kate Sullivan-Hare, executive director of health-care policy for the U.S. Chamber of Commerce.

Take General Motors. The world's largest automaker supports the health care needs of 170,000 active workers and 430,000 retirees — more people than are in the U.S. Army. GM's future obligations for health care costs are over $69 billion. It spends $5 billion a year on health.

“At the end of 2004, we spent $1,525 per vehicle for health care alone,” said Woody Williams, GM’s health care director.

Rapidly rising health care costs reduce competitiveness vs. foreign companies and force businesses to cut back on new hiring, wage increases and capital investment. It’s a feedback effect dragging down the overall economy.

“It is absolutely unsustainable that health care continues to rise anywhere from 11 to 15 percent,” said Williams.

indicates health care costs gobble up nearly one-quarter of the growth in the economy. 

“None of the things we are doing now are going to rein in health care cost increases,” said Dr. Alan Sager, one of the study’s co-authors. “Unless we do something different, health care is going to take a bigger and bigger share of the U.S. economy every year — even though more and more people are losing health insurance coverage.”

But at the Trolley Car Diner, Ken Weinstein says he and his workers need help — now.

“The federal government is going to have to ante up and put more money into health insurance,” he said. “And they're going to have to somehow regulate the insurance companies so there is health cost control. There is no other way of doing it.”

That’s one businessman's solution to the problem. But there are a number of other ideas being proposed by the White House, the Congress and corporate America.

Today, alone among industrialized democracies, the United States has no national health insurance system. And yet we spend more on health, some 14.6 percent of Gross Domestic Product, than other industrialized democracies. Germany spends 10.9 percent of GDP; France spends 9.7 percent; Canada, 9.6 percent; Italy, 8.5 percent; United Kingdom, 7.7 percent and Japan, 7.8 percent, according to the Organization for Economic Cooperation and Development

The failure of former president Bill Clinton's national health care plan to win approval in Congress stigmatized the idea of a government-run health care system. In his recent State of the Union address, President Bush laid out his health care agenda.

The solution, he said in that speech, includes “tax credits to help low-income workers buy insurance; a community health center in every poor county; improved information technology to prevent medical error and needless costs; association health plans for small businesses and their employees, expanded health savings accounts, and medical liability reform”

The approach is consistent with Bush's larger concept of an “ownership society.” But experts say some features of his agenda — such as giving low-income individuals a $3,000 tax credit to help buy insurance — could have unintended consequences.

“They are not enough for most uninsured Americans to go out and buy health care coverage with,” said Aaron at the Brookings Institution. “But they are enough to induce some employers ... to say ‘I’m out of here.’ … This financial incentive could give them cover to drop their sponsorship.”

But corporate America says its time for health care consumers to take a greater share of responsibility for their care.

“One of the things that we as a country and as a health care system [need] is more transparency and making this more-consumer centric health care system,” said GM’s Williams.

“We simply don’t have the demographics to support an employer-based health care system forever,” said Sullivan-Hare at the U.S. Chamber of Commerce. “We don’t now live in a society where someone goes to work for one company for forty years. It’s a much shorter period, you change jobs more — and people feel like, ‘It’s my own health plan, it’s my own personal choice and I would rather make that choice on my own.’”

One thing business leaders, public policy makers and researchers agree on is that there’s too much waste in the health care system.

“About 30 cents of every dollar is spent on overhead costs,” said Kansas governor Sibelius. “On administration, filling out paperwork, credentialing providers, chasing down insurance company reimbursement, having 14 different kinds of plans in the marketplace. In Kansas, we are trying to tackle that overhead cost.”

“The challenge is squeeze out as much as we can of the health care that is wasted, catch the savings in a bucket and recycle the savings to finance the care that uninsured or under insured patients need,” said Boston University’s Sager.

One thing is for certain: rapidly escalating medical costs are putting lawmakers under pressure from the business community and the public to do something to fix our health care system.