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Spending

U.S. health care spending continues to rise and accounts for an increasing portion of the national budget. As a result, cost containment is often a goal, sometimes the primary goal, of many health policy proposals. Understanding how a proposal will affect both total health care costs and the distribution of costs across public and private sectors is an essential step in assessing policy options.

Current and Projected Health Care Spending
National Health Spending as a Share of GDP
Sources of Health Spending
Distribution of Health Care Spending
Trends Affecting Health Care Spending
References
Current and Projected Health Care SpendingSave to My Compare

National Health Expenditures (NHE) include the sum of spending on all U.S. health services and supplies (e.g., personal health services, government public health spending, and administrative costs of public and private health insurance) plus the costs of investments (e.g., buildings, equipment, noncommercial medical research) (U.S. Department of Health and Human Services, 2007). The Centers for Medicare & Medicaid Services estimate was that health care spending in the United States reached $2.1 trillion in 2006 and was projected to reach $2.25 trillion by 2007. This represents an annual spending increase of 6.7 percent.

The most recent projections from CMS (U.S. Department of Health and Human Services, 2009a) suggest an average annual growth rate of about 7 percent through 2017. Based on this prediction, U.S. health spending could reach $4.3 trillion and comprise 19.5 percent of the gross domestic product (GDP) by 2017 (U.S. Department of Health and Human Services, 2009b). Figure 1 charts past and estimated health care spending from 1965 to 2018.

Figure 1. National Health Expenditures—Actual and Projected, 1965–2018

Figure 1. National Health Expenditures—Actual and Projected, 1965–2018 SOURCE: U.S. Department of Health and Human Services, 2009a. Click to Zoom
National Health Spending as a Share of GDPSave to My Compare

Another context in which to examine health spending is as a share of gross domestic product. Using this context facilitates an understanding of how health spending might affect other types of spending in the country.

Health spending as a share of GDP is expected to grow from its 2008 level of 16.3 percent to an estimated 19.5 percent of GDP in 2017 (about $4.3 trillion). Overall, GDP is also projected to grow over this period (on average, 4.7 percent per year), but health care costs will grow faster than GDP. In fact, through 2018, health care spending growth is expected to outpace GDP growth by an average of 1.9 percentage points annually. By 2017, about 20 cents of every dollar spent in the U.S. economy will be spent on health care.

Figure 2 shows the rates of growth in NHE and in GDP and the resulting trend in NHE as a share of GDP from 1990 to 2018.

Figure 2. National Health Expenditures as a Share of GDP and Average Annual Growth in NHE Versus Growth in GDP, 2005–2018

Figure 2. National Health Expenditures as a Share of GDP and Average Annual Growth in NHE Versus Growth in GDP, 2005–2018 SOURCE: Keehan et al., 2008; based on data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and National Bureau of Economic Research. NOTES: The left axis (NHE share of GDP) relates to the gray bars. The right axis (percentage change in GDP and NHE) relates to the two line graphs. The figure shows historical data through 2007 and projected data from 2008 to 2018. Recessions took place during July 1990 through March 1991, March 2001 through November 2001, and December 2007 through 2009 (projected) and are denoted by shading. Click to Zoom
Sources of Health SpendingSave to My Compare

Health spending comes from both public and private sources. The former includes spending by federal and state governments on public health insurance programs such as Medicaid and Medicare and government public health activities, among other things. Private spending includes private insurance premiums (paid by individuals and employers) and consumer out-of-pocket spending for deductibles and co-payments.

Figure 3 shows sources of total health care spending in 2006.

Figure 3. Health Care Spending, 2006

Figure 3. Health Care Spending, 2006 SOURCE: U.S. Department of Health and Human Services, 2009a, "Personal Health Care." Click to Zoom

Figure 4 provides additional details on health care spending from public sources.

Figure 4. Details of Public Sources of Health Care Spending, 2006

Figure 4. Details of Public Sources of Health Care Spending, 2006 SOURCE: U.S. Department of Health and Human Services, 2009a, "Personal Health Care." Click to Zoom

The sources of health spending have changed over time (see Figure 5).

Figure 5. Sources of Payments for Health Care, 1965–2018 (historical and projected)

Figure 5. Sources of Payments for Health Care, 1965–2018 (historical and projected) SOURCE: U.S. Department of Health and Human Services, 2009a. Click to Zoom
  • In 1965, out–of–pocket expenses made up 44 percent of health spending, private insurance made up 24 percent, and federal outlays constituted 11 percent.
  • By 1980, out–of–pocket expenses decreased sharply to only 23 percent of health spending, while the proportion of federal health spending increased to 28 percent.
  • In 2000, the proportion of out–of–pocket spending had fallen to 14 percent of total health spending, and federal outlays made up 31 percent of heath spending.
  • Currently, the proportions of health care spending are even more weighted toward federal spending and private insurance (33 percent and 35 percent, respectively); out-of-pocket expenses are now equivalent to state and local contributions (12 percent).

Total federal spending has grown, on average, about 12 percent per year, about twice as fast as out–of–pocket expenses, which are growing at an annual rate of about 6.5 percent. Private insurance grows at about 10 percent per year; and state and local spending grows at about 9 percent.

Distribution of Health Care SpendingSave to My Compare

Personal health care expenditures consist of the total amount of money spent to treat individuals with specific medical conditions. Figure 6 shows the components of personal health care expenditures in 2006.

Figure 6. Personal Health Care Expenditures, by Type of Expenditure, 2006

Figure 6. Personal Health Care Expenditures, by Type of Expenditure, 2006 SOURCE: U.S. Department of Health and Human Services, 2009a. NOTE: The Physician category includes physician and clinical services; hospital category, hospital care; other category, other personal health, dental services, other professional care, structures and equipment, and home health care. Click to Zoom

Figure 7 shows how the types of health care expenditures have evolved and are predicted to evolve from 1965 to 2018.

Figure 7. Personal Health Care Expenditures, by Type of Expenditure, 1965–2018

Figure 7. Personal Health Care Expenditures, by Type of Expenditure, 1965–2018 SOURCE: U.S. Department of Health and Human Services, 2009a. Click to Zoom

Although the total amount of spending on each type of health service has risen over time, the share of spending on different types of services has not changed significantly over time.

  • In 1965, prescription drugs made up 11 percent of personal health care expenditures; in 2006, prescription drugs accounted for 7 percent.
  • In 1965, other services such as dental services, other professional care, structures and equipment, and home health care made up 21 percent of personal health care expenditures; in 2006, they constituted 18 percent.
  • In 1965, nursing home expenses were 4 percent of personal health care expenditures; in 2006, they constituted 12 percent.

Growth rates have also remained constant among the different types of personal health expenditures over time. Physician, hospital, and other expenses grow at an average annual rate of 9 percent. Prescription drug and nursing home expenses grow at about 10 percent per year. Compounded growth rates and different initial values account for the differences among the curves in Figure 7.

Trends Affecting Health Care SpendingSave to My Compare

A number of trends are expected to affect patterns of future health care spending.

Aging of the population: The elderly are an increasing proportion of the U.S. population. Between 1950 and 2005, while the overall population grew at a rate of 1.2 percent, the population of those over 65 grew at 2 percent per year, and the number of individuals over age 75 increased at 2.8 percent per year. Figure 8 shows the rising number of elderly compared with the general population.

Figure 8. Growth Rates, Total Population, and Older Population in the United States, 1950-2050

Figure 8. Growth Rates, Total Population, and Older Population in the United States, 1950-2050 SOURCE: NCHS, 2007. Click to Zoom

The health (and resultant health care spending) of the future elderly are affected by several factors:

  • People are living longer lives in better health
  • Levels of chronic disease are increasing in younger populations, suggesting that the health of the future elderly may be worse than that of the current elderly population.

Goldman et al. modeled how the health of the future elderly would affect Medicare spending. They examined three possible scenarios (Goldman et al., 2005). In scenario A, the researchers forecast the health of new Medicare beneficiaries, using all the information available, including the health of the younger population. In scenario B, the analysts assumed that new beneficiaries would have the same constellation of diseases and disabilities as the healthy beneficiaries from the 1990s. In scenario C, the team assumed continued improvement in the health status of the entire elderly population, including new beneficiaries.

Figure 9. Health Spending per Medicare Beneficiary Under Three Scenarios, 2000–2030 (1999 $)

Figure 9. Health Spending per Medicare Beneficiary Under Three Scenarios, 2000-2030 (1999 $) SOURCE: Goldman et al., 2005. Click to Zoom

Scenario C is the most optimistic and has the most favorable implications for Medicare spending: Spending per Medicare beneficiary is 8 percent lower than under scenario A. However these differences in cost per beneficiary do not translate into substantial overall cost savings for Medicare. Healthier people live longer and so have more years in which to accumulate costs.

Obesity: The incidence of obesity in the U.S. population is increasing. In 1960, just 13 percent of the population age 20-74 was obese; in 2003-2004, the number had increased to 34 percent (NCHS, 2007). Obesity is associated with higher rates of heart disease, diabetes, and some types of cancer. As a result, it is also associated with higher health care spending.

  • Lakdawalla, Goldman, and Shang (2005) modeled the effects of obesity on health spending. They found that from age 70 onward, Medicare spends 35 percent more for an obese person than for someone of normal weight.
  • Yang and Hall (2008) found that people who were overweight or obese at age 65, had 6 to 17 percent higher lifetime health spending than people of normal weight at the same age.
  • Thorpe et al. (2004) examined differences in health spending between 1987 and 2001 and calculated that 27 percent of the increase in health spending was attributable to obesity.

Technological changes: Advances in medical care over the last century have made it possible to treat an increasing number of medical conditions in larger numbers of people. These technological advances have substantial cost effects (Goldman, 2005). Some technologies (e.g., intraventricular cardioverter defibrillators) are very expensive. Others, although less expensive, are being used by an increasing number of patients, which can increase total costs. Certain technological changes, for example some vaccines, may reduce spending. However, in general new technologies tend to increase the number of health services that an individual receives, thereby increasing costs.

Historically, technological advances have tended to stimulate changes in clinical practice that increase spending. The Congressional Budget Office estimates that technological advances have contributed to approximately half of the increase in overall U.S. health spending (CBO, 2008).

Figure 10 illustrates the broadening dispersion of medical technology by charting increased use of coronary, dialysis, and joint replacement procedures by patients age 50 and over from 1970 to 2004.

Figure 10. Use of Selected Health Care Procedures by Patients Age 50 and Older, 1970–2004

Figure 10: Use of Selected Health Care Procedures by Patients Age 50 and Older 1970-2004 SOURCE: CBO, 2008. Click to Zoom
ReferencesSave to My Compare

Congressional Budget Office (CBO), Technological Change and the Growth in Health Care Spending, Washington, D.C.: Congress of the United States, Congressional Budget Office, Pub. No. 2764, January 2008.

Goldman DP, Shang B, Bhattacharya J, Garber AM, Hurd M, Joyce GF, Lakdawalla DN, Panis C, Shekelle P, "Consequences of Health Trends and Medical Innovation for the Future Elderly," Health Affairs, Web Exclusives, September 26, 2005, pp. w5.R5–w5.R18.

Keehan S, Sisko A, Truffer C, Smith S, Cowan C, Poisal J, Clemens MK, the National Health Expenditure Accounts Projections Team, "Health Spending Projections Through 2018: The Baby–Boom Generation Is Coming to Medicare," Health Affairs, Web Exclusives [Epub: Vol. 27, No. 2, February 26, 2008], pp. w145–w155.

Lakdawalla D, Goldman DP, Shang B, "The Health and Cost Consequences of Obesity on the Future Elderly," Health Affairs, Web Exclusives, September 26, 2005, pp. w5.R30–w5.R41.

National Center for Health Statistics (NCHS), Health, United States, 2007: With Chartbook on Trends in the Health of Americans, Hyattsville, Md., 2007.

Thorpe KE, Florence CS, Howard DH, Joski P, "The Impact of Obesity on Rising Medical Spending," Health Affairs, Web Exclusives, October 20, 2004, pp. w4.480–w4.486.

U.S. Department of Health and Human Services, National Health Expenditures Accounts: Definitions, Sources, and Methods, 2007, Washington, D.C.: Centers for Medicare & Medicaid Services, 2007.

U.S. Department of Health and Human Services, NHE Historical and Projections, 1965–2018, Washington, D.C.: Centers for Medicare & Medicaid Services, January 2009a. As of August 7, 2009: http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage

U.S. Department of Health and Human Services, NHE Projections, 2008–2018, Forecast Summary, and Selected Tables, Washington, D.C.: Centers for Medicare & Medicaid Services, January 2009b. As of August 7, 2009: http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage

Yang Z, Hall AG, "The Financial Burden of Overweight and Obesity Among Elderly Americans: The Dynamics of Weight, Longevity, and Health Care Costs," Health Services Research, [Epub October 29, 2007], Vol. 43, No. 3, June 2008, pp. 849–868.

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