What drives health care costs up?

Being the free-market enthusiast that I am, I decided to sit down and take a look at what the medical field says are the primary drivers of health care costs. What I've discovered has been an interesting revelation: I know that the health care system (providers, insurers, patients, government) is complex, but until I actually started looking at what makes up the individual pieces of the complex puzzle, I did't really appreciate what makes it tick.
So, for a quick-ish summary of the relevant factors, let me refer you to a study done in 2003 by the National Institute of Health Policy and the University of Minnesota School of Public Health (.pdf). Yes, the study was from 6 years ago, but the factors will be the same today.
Here's how the NIHP saw the health care industry's cost drivers:

A) Provider Costs
- Physician compensation. Related to type of provider (GP vs. specialist, inpatient vs. outpatient) and productivity (# of patients seen annually)
- Malpractice premiums and so-called Defensive Medicine (i.e. doing multiple tests "just to be sure" so the doc isn't sued for "not doing enough").
- Supply and Demand. What you would expect. Demand for physicians is dependent in large part on the demographic of the local area (old, young, rich, poor, ethnicity, etc). Also, a larger supply of physicians (specifically specialists) can increase the client demand over time. One point that was made in this section had to do with the doctor's preference for "Evidence-Based Medicine" vs. "Consensus-Based Medicine", which was an interesting point to me.

B) Hospital Costs
- Wage pressure. A shortage of health care professionals (say, the ongoing nursing shortage) will create an upward shift in price (i.e. higher salaries) to attract the workforce.
- Technology and pharmaceutical costs. Self explanatory, and obviously high cost drivers. We must be aware of what are called "outliers". Think of the "million dollar babies" or patients with rare or complex disorders. These outliers will eat up a disproportionate amount of hospital resources relative to the general population.
- Hospital Competition. This one I found interesting. Again, being the free-marketeer that I am, I am pro-competition, viewing it as the best path to cost containment, innovation, and business success over the long term. What this paper suggests, however, is that in the health industry, one result of competition is a sort of health care "arms race", wherein competing hospitals "will employ more capital and equipment, produce more expensive medical care and incur higher costs than hospitals operating in monopolistic markets." Essentially, competing hospitals want to show prospective future customers that they have the better technology, the better specialists, and can handle the harder cases than their competition, even though a broad market for same is not necessarily there. Result - high up front expenses for the hospital not matched by consistent cash flow from those resources. Thus, those costs must be subsidized elsewhere (i.e. patients who don't use those high tech resources will pay the hospital's premium anyway just by virtue of being a patient there).
- Consolidations. They don't always save money, though they are a fact of business life. This is true in any industry. *ahem*TimeWarnerAOL*ahem*
- Capital Improvements. This is driven primarily by two factors: the age of the facility as a whole, and the local patient demographic. New facilities need to be upgraded, both for new technology and for appearances. Who wants to give their money to a dilapidated hospital with poor lighting and few windows? As far as the patient demographic, older patients have different needs than younger ones. Hospitals in retiree-laden Florida probably should all have state-of-the-art cardiology and orthopedic centers.

C) Pharmaceuticals
- R&D, legal, marketing, and government compliance are primary cost drivers for the pharmaceutical industry. I don't even want to get into the pros and cons of the drug industry or pharmaceutical drugs in general. Save that debate for somewhere else.

D) Consumer Behavior
- The paper stresses the demands of consumers for the newest technology, drugs, procedures, etc as a huge cost driver, saying, in effect, if the consumer didn't want these high-cost procedures, there would be little to no push by the health care industry to provide them. Which is true, taken by itself. That's economics 101. It's simplistic, but true. But remember that consumer behavior is driven, in large part, by industry advertising. It's a sort of vicious circle.

E) Insurance Costs
- The Insurance Payment System. The vagaries and complexities of the health insurance system lead to inefficiencies, confusion, overpayment, underpayment, delay in payments, and other problems.
- Administrative costs. This includes government regulation and coverage mandates, which impact consumer costs directly. A 2008 study (.pdf)by the Council for Affordable Health Insurance found almost 2000 insurance coverage mandates nationwide, which adds between 20-50% to the cost of health insurance premiums depending on the state you live in.
- Cost Shifting. This innocuous term includes one of the most controversial topics in the politics of health care: the uninsured (which includes illegal aliens). Medical personnel are required by law to provide some basic level of care to those who cannot pay for the service. There are direct and indirect costs borne by the provider that are not offset by payment from the patient. These costs must be recouped elsewhere. That "elsewhere" is you and me.
- Risk Pool Instability. Another vicious circle. Higher medical costs mean higher insurance premiums. Which means some will opt out of the insurance system in favor of self-insurance. Typically, these will be younger, healthier people. This skews the pool of insured upward with regard to age and overall health. From an actuarial standpoint, this pushes the future costs of the risk pool up, which means premiums will rise further.

F) Other Costs
There are other significant cost drivers in the health care system that this paper does not touch on, but should have.
- Personal medical device cost and prevalence. Including pacemakers, hearing aids, oxygen machines, mobility devices, etc.
- Hospital Operations. The efficiency vs. quality debate of medical care.
- Demographics. The aging (and increasing longevity) of the population.
- Health System Capacity.
- Preventative Care. Cost vs. Benefit.

Not that this list is particularly exciting, or even complete, but it does give a sense of the complexity of the situation. What I'm going to try to do, or find someone else who has already done it well, is to come up with free market reforms that would improve (i.e. reduce the cost of) as many of these points as possible. If someone can come up with the easy-but-wrong government "fix" for health care/insurance reform, the case for free market reform should be put up right next to it as a counter argument.