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Health care costs have been rising for several years. Expenditures in the United States on health care surpassed $2.2 trillion in 2007, more than three times the $714 billion spent in 1990, and over eight times the $253 billion spent in 1980. Stemming this growth has become a major policy priority, as the government, employers, and consumers increasingly struggle to keep up with health care costs. [1]
In 2007, U.S. health care spending was about $7,421 per resident and accounted for 16.2% of the nation’s Gross Domestic Product (GDP); this is among the highest of all industrialized countries. Total health care expenditures grew at an annual rate of 6.1 percent in 2007, a slower rate than recent years, yet still outpacing inflation and the growth in national income. Absent reform, there is general agreement that health costs are likely to continue to rise in the foreseeable future. Many analysts have cited controlling health care costs as a key tenet for broader economic stability and growth, and President Obama has made cost control a focus of health reform efforts under way.
Although Americans benefit from many of the investments in health care, the recent rapid cost growth, coupled with an overall economic slowdown and rising federal deficit, is placing great strains on the systems used to finance health care, including private employer-sponsored health insurance coverage and public insurance programs such as Medicare and Medicaid. Since 1999, employer-sponsored health coverage premiums have increased by 119 percent, placing increasing cost burdens on employers and workers. [2] With workers’ wages growing at a much slower pace than health care costs, many face difficulty in affording out-of-pocket spending.
Government programs, such as Medicare and Medicaid, account for a significant share of health care spending. Public health expenditures made up about 46% of the health care dollar in 2007, with the remainder split between private and out-of-pocket spending (42% and 12%, respectively). Medicare spending has grown at a slightly lower rate, on average, than private health insurance spending, at about 9.0 vs. 10.1% annually respectively between 1970 and 2003. [3] Medicaid expenditures, similarly, have grown at slower rate than private spending, though the current economic recession is likely to increase the number of enrollees in Medicaid and therefore increase Medicaid spending. [4]
How is the U.S. health care dollar spent?
As shown in the figure below, hospital care accounts for the largest share (31%) of health expenditures. Physician services are the next largest item, comprising one-fifth of the national health spending. Prescription drugs, while accounting for only 10% of total expenditures, have been one of the fastest-growing segments.
National Health Expenditures, 2007
Background Brief
Total = $2.241 Trillion
Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.
What is driving health care costs?
Controlling health care expenditures requires a solid understanding of the factors that are driving the growth in spending. While there is disagreement on exactly what those are, some of the major factors to consider are:
Prescription drugs and technology – Spending on prescription drugs and new medical technologies has been cited as the primary contributor to the increase in overall health spending. Some analysts state that the availability of more expensive, state-of-the-art drugs and technological services fuels health care spending not only because the development costs of these products must be recouped by industry but also because they generate consumer demand for more intense, costly services even if they are not necessarily cost-effective. [5]
Chronic disease – The nature of health care in the U.S. has changed dramatically over the past century with longer life spans and greater prevalence of chronic illnesses. This has placed tremendous demands on the health care system, particularly an increased need for treatment of ongoing illnesses and long-term care services such as nursing homes; it is estimated that health care costs for chronic disease treatment account for over 75% of national health expenditures. [6]
Aging of the population – Health expenses rise with age and as the baby boomers are now in their middle years, some say that caring for this growing population has raised costs. This trend will continue as the baby boomers will begin qualifying for Medicare in 2011 and many of the costs are shifted to the public sector. However, experts agree that aging of the population contributes minimally to the high growth rate of health care spending. [7]
Administrative costs – It is estimated that at least 7% of health care expenditures are for administrative costs (e.g. marketing, billing) and this portion is much lower in the Medicare program (<2%),>
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