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A Long-term History of Health Spending

By January 14, 2015Commentary

Most of us have grown up in an era of rapidly rising national health spending, but that wasn’t always the situation.  A post at the Altarum Institute examines trends and makes observations both regarding the past and future of health spending.   (Altarum Post)  Going back to the era around 1850, health spending was a very low percent of national income, or GDP.  Consumers didn’t have insurance, there wasn’t significant government spending and most importantly, people needed to use their income just to meet the necessities of life–shelter, food and clothing.  As national income grew, health spending also grew, at perhaps a half percent in excess of GDP, until around 1900, when it accelerated, probably gradually, to 1% over national income growth.  The leap in spending increases began to occur in the 1950s and accelerated in the 1960s.  Looking at a 15 year moving average of health spending compared to GDP growth shows this dramatic rise, with a sudden jump beginning around 1955 and hitting a peak of 3.5% excess growth in the late 1960s, which has gradually declined from there to today’s roughly 1.5% gap, again on a 15 year moving average basis.  Why the sudden jump?  A large part has to do with the rapid growth in the economy following the second world war.  The cumulative effect of medical innovation also plays a role, as people are living longer and there simply are more treatments to apply to their health care needs.  Private and public investment in medical advancements increased rapidly, with NIH funding skyrocketing, and public companies and venture funds devoting substantial capital to drug, device and diagnostic discovery.  The widespread growth of public insurance programs and private health plans also played a role.

On the positive side, the author believes that we have likely seen the peak of the excess in growth of health spending over growth in GDP.  There is obviously a limit to how much any country can spend on health care.  At some point the tax burden to support government health programs becomes unsustainable and consumers can only spend so much of their income on health without seriously affecting their quality of life.  The United States is likely at that point.  The author thinks that there may yet be a post-recession rebound that causes health spending increases to exceed GDP growth by one-half to one and a half percent, but that eventually the gap will have to recede to zero.  That seems like a reasonable projection and would be good economic news, but only if it occurs without a decline in the health status of the population or a lessening in the quality of health care.

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