Spending on U. That growth has slowed at times, as in the mid- to late s and early s, but since it amounts to annualized growth in real per capita spending of 3. From to , growth has been slower 2. A small part of the reason for this growth is the aging of the U. But this aging-related increase is only a small portion of the overall rise in spending: if the pattern of spending by age had remained constant at levels, the aging that took place from to would have led to a 34 percent rise in per capita spending—far below the percent total increase over that same period.
Some of the increase simply reflects the growing spending that takes place as per capita income grows, and some comes from innovations that bring new health-care services and products. But understanding why health care has had little productivity growth relative to the rest of the economy is important Sheiner and Malinovskaya As we explore in subsequent facts, problems with health-care markets have contributed to rapidly rising costs in recent decades.
The United States spends much more on health care as a share of the economy Public spending by the United States 8. However, public health insurance in the United States covers only 34 percent of the population, much less than the universal coverage in countries like Canada and the United Kingdom Berchick, Barnett, and Upton ; OECD b , indicating that it costs far more to provide coverage in the U. Figure 2 distinguishes spending on the basis of the ultimate payer, such that government payments to private providers are counted as public spending.
Almost all U. This is in contrast to those countries that also rely largely on private providers but have the government as the payer e. Note that the countries shown in figure 2 are high-income, advanced nations with near-universal health coverage, meaning that the gap in spending is not primarily explained by differences in coverage rates or income levels, but rather by differences in health-care institutions and policy.
What do Americans get for their additional health-care spending? In the United States, life expectancy at birth is the lowest of the countries in figure 2; maternal and infant mortality are the highest Papanicolas, Woskie, and Jha But what does the United States purchase with all this spending?
Roughly a third of all health-care spending goes to hospital care figure 3 , making clear that the functioning of the U. Professional services make up roughly a quarter of spending. Professional services are those provided by physicians and nonphysicians outside of a hospital setting, including dental services. The combination of long-term care, nursing care facilities, and home health care account for 13 percent of total health expenditures.
Prescription drugs are next at 9 percent, and net health insurance costs i. Insurance covers these different expenditures to varying degrees.
However, for individuals and especially for the system as a whole , the expense of professional services is much larger. Much health spending consists of labor costs, rather than capital investment. Lowering these labor costs requires some combination of increased labor supply, e. Health-care spending in any given year is distributed very unequally. The half of the population using the least health care accounts for only 3 percent of total not just out-of-pocket expenditures excluding long-term care and some other components of spending ,[12] while the top 1 percent accounts for 22 percent figure 4.
One reason for this is that health misfortunes can strike at random, causing one-year expenditures to spike. In any given year the distribution can be very unequal, but only some of those with the highest spending will continue to have high spending in subsequent years Cohen and Yu The bottom half of health-care users are disproportionately young and consequently less likely to need expensive health care but apt to need it later in life. Many people will incur high end-of-life expenditures—such costs accounted for 13 percent of personal health-care costs in Aldridge and Kelley —but in any given year most people do not incur these costs.
Also, at 13 percent, end-of-life care is important but not a dominant part of U. When individuals incur high costs, insurance is usually necessary to prevent extreme financial hardship. At the same time, the existence of insurance means that patients bear less financial responsibility for the cost of their care and have less incentive to control costs. In other cases—such as emergencies—patients are often unable to compare costs or weigh prices.
Both of these features mean that normal downward pressures on prices may not operate in the standard way in a health-care market. We use it in figure 5 to explore how the level and variation in health-care expenditures total, rather than out-of-pocket differ across people of varying health conditions.
People enjoying good health are, unsurprisingly, not a major driver of health-care expenditures. More striking is the dramatically higher range of expenditure levels for those in poor health.
The group of people who report poor health as well as low health-care expenditures may have health problems that are not resolvable through expensive medical services, but they may also be medically underserved, whether because of a lack of insurance or other reasons Cunningham Regardless, health status alone may not always be a good guide to expected expenditures in a given year.
Some places in the United States have considerably higher health-care spending than others. This is not primarily a matter of elderly people being disproportionately represented in certain areas. Figure 6 shows spending per privately insured beneficiary after adjusting for differences across places in age and sex Cooper et al. The upper Midwest, much of the east coast, and northern California are all notable as places with especially high spending. In a comparison of so-called hospital referral regions i.
Roughly half of the overall variation is associated with differences in prices across regions, with the other half due to differences in the quantity of health care consumed.
Surprisingly, a significant amount of the national variation in prices occurs within hospitals Cooper et al. Medicare spending is somewhat different: prices are set administratively rather than through decentralized negotiations between payers and providers. Most of the geographic variation in Medicare spending is accounted for by differences in health-care utilization across places—especially in post-acute care—rather than by prices Cooper et al.
Further, about half of the variation in utilization is driven by demand-side factors like health and preferences, but differences in supply across places are also important Finkelstein, Gentzkow, and Williams Is this spending variation evidence of a problem that policy should address?
The answer and the policy response, if one is called for depends on whether spending is especially high in some places because of insufficient competition and related market failures Cooper et al.
In a well-functioning competitive market, prices for the same service will not vary widely within a given place: consumers will avoid a business that charges much higher prices than its competitors. However, many health-care markets dramatically violate this expectation. Figure 7 focuses on health-care price variation within selected metro areas, showing that some metropolitan statistical areas feature much more price variation than others. For a C-section delivery, prices vary widely both across and within markets: the 10th to 90th percentile range is 9.
Doctors get paid more. Hospital services and diagnostic tests cost more. And a lot more money goes to planning, regulating and managing medical services at the administrative level. In other areas, despite conventional wisdom, there seems to be less discrepancy between the U.
Experts have previously suggested high utilization rates could explain high spending in the U. But looking at hospital discharge rates for various procedures, such as knee and hip replacements and different types of heart surgeries, the researchers found that use of care services in the U. In fact, compared to the average of all the nations, Americans appear to go to the doctor less often and spend fewer days in the hospital after being admitted.
Think tanks such as the Brookings Institute have suggested that low social spending might also partly be to blame, since funding programs to assist low-income families, the elderly and the disabled would mitigate the demand for medical care.
But, again, researchers did not find a substantial difference in U. Another popular argument is that the American system has an unnecessarily high number of specialists, who typically earn more than general physicians, and that ramps up spending. But, according to this report, "the ratio of primary care physicians to specialists was similar between the United States and other high-income countries.
Specialists, nurses and primary care doctors all earn significantly more in the U. Administrative costs, meanwhile, accounted for 8 percent of total national health expenditures in the U.
For the other countries, they ranged from 1 percent to 3 percent. Health care professionals in America also reported a higher level of "administrative burden.
As for the drug market, the U. Switzerland followed closest behind the U. Individual services cost a lot more, too.
In , "the average cost in the U. Higher spending in some areas could make sense. There are lots of ideas about what types of policies could slow health cost growth in the long term.
Some health economist think that we might actually have bent the health-care cost curve, citing four years of slower-than-normal growth — although this point is fiercely debated. There's general agreement across political lines that it would be a good idea to bend the cost curve but how to get there is a whole lot murkier territory.
A lot: health care spending has been — and will likely continue to be — the fastest growing part of the federal budget. Both Medicare and Medicaid are expected to get a lot bigger over the next decade, enrolling millions more people than the million they cover right now.
In Medicare this is largely driven the cost growth is largely driven by the fact that our population is getting older, with thousands of baby boomers aging onto the program every day. The health care law expanded the Medicaid program to cover millions more people than it used to, and that will also drive up the federal government's spending on health care programs. A handful of studies here , here, and here have attempted to pinpoint the reason why health-care costs typically grow a lot faster than the rest of the economy.
They point to a few factors but generally see new medical technologies as the chief reason health spending has grown quickly in the second half of the 20th century. Whether this is a good thing depends a bit on the type of technology and how its used. Some of the medical advancements allow doctors to treat patients better than ever before. Others don't outperform older methods — but do contribute to rising health-care costs.
New technologies tend to contribute to the growth of overall health-care prices. Drug and device-makers often charge higher prices for new treatments, even if their outcomes aren't that much or any better than old treatments.
Unlike many other countries, the United States does not regulate health-care prices, leaving doctors and hospitals to decide whether they will buy these more expensive treatments.
Usually they do — although there has been some push back recently to especially expensive drugs. For decades, health-care costs have grown faster than the rest of the economy. In the s, for example, health-care costs grew by an average of 11 percent each year — a time period when the rest of the economy averaged 7. That meant health care ate up a greater and greater share of total American spending. But since , health-care spending has grown at the same rate — or in , slower-than the rest of the economy.
In , health care actually shrank, just slightly, as a percent of gross domestic product, falling from There is some especially recent data that does show health-care costs growing faster. The Bureau of Economic Analysis' data shows that health-care spending grew by 5. This is just one data point though, and it's still too early to tell whether it portends an about-face on the health spending slowdown.
There are two schools of thought among researchers here. One suggests that the slowdown is temporary and a side effect of the recent recession. This theory relies on data showing that all previous recessions were followed by a period of slower-than-average health cost growth. If spending rebounds as the recession fades — as has been the case during prior downturns — the current slowdown would not have much of an impact on future health costs.
Harvard University's Amitabh Chandra has written one of the most-thorough versions of this argument. The other argument is that the health spending slowdown is structural and will likely lead to slower cost growth in the future. Supporters of this theory suggest that the slowdown is steeper, and has lasted longer, than what the recession can explain.
They often point to significant changes in the health care industry — the growth in out-of-pocket spending, for example, or Obamacare's programs to drive down spending — as potential drivers of structural change. Harvard University's David Cutler is a strong proponent of this view. The drafters of the Affordable Care Act certainly hope so — which is why they included dozens of Obamacare programs that try to move the health-care system from one that pays for volume, to one that pays for value.
Right now, most of the American health-care system operates in a fee-for-service model; a hip surgeon gets paid a set fee for each hip surgery, regardless of whether his patients have complications down the line or come out of the procedure as good as new. Obamacare aims to tether doctors' payments from Medicare to patient outcomes, rewarding doctors who make people healthier with more money.
Accountable Care Organizations , one big Obamacare program, has big groups of doctors band together and agree to take a lump sum payment for the care they provide to Medicare patients. If they can provide care at a lower price than the lump sum — and, again, hit certain quality metrics — they pocket the difference as profit.
There's also one big reform in the health care law meant to drive down the private health insurance spending. The Cadillac Tax levies a 40 percent tax on the more expensive health plans that employers provide to workers.
These plans tend to offer the most generous coverage. They typically require little if no contribution on the part of the worker when they go to the doctor, and might not have a deductible either. When people don't have to pay for their doctor visits, they tend to go to the doctor a lot. The idea of the Cadillac Tax is to discourage these plans with really low-cost sharing, in favor of those that attach a price to every doctor trip — likely reducing overall health care usage as a result.
This is very much a work in progress.
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