A Brief History of Health Spending

Given that health spending is roughly one-fifth of the economy, and that at least half of it is paid for by the taxpayers, economists spend a fair amount of time trying to understand trends in that spending, particularly over the next few years.  A new paper at the National Bureau of Economic Research explores that topic.   (NBER Paper)   The US spends more than other developed countries on health care and the gap has grown over time.  Comparing per capita health spending to per capita GDP gives a pretty linear result in 33 OECD nations, but the US is a clear outlier, spending about 9% more on health care than that formula would suggest.  Some of this is likely due to health status, demographic and other factors, but previous analyzes have shown that most of it relates to unit price differentials.  The authors looked at spending since about 1960, finding different trends in US health spending over this time.  The 1960-1980 period was marked by very rapid spending growth.  Gee, think that may have had anything to do with the introduction of Medicare and Medicaid?  Then concern over the sustainability of spending growth led to the beginnings of managed care, which moderated growth rates for a short time before a provider reaction and other factors created faster growth from 1994 to 2002.  The last ten years or so have seen more moderate growth, but always at or above per capita GDP increases.  One result of all our health spending has been an increase of almost ten years in life expectancy from 1960 to the present.  Anybody want to give up those ten extra years of life?

The researchers explore a variety of factors for health spending growth–more technology, more insurance, demographics, education, wealth, etc.  And they look at the various government and private attempts to control spending.  Government programs have mostly relied on their ability to dictate price, within political limits, to control spending, while private payers have tended to also look at appropriateness of care patterns or specific treatments.  They refer to the last decade as a “golden era” of health spending growth, which has remained relatively low.  The researchers attribute this to both economic effects–the country has either been in recession or experiencing very slow GDP increases during this entire time period; and to changes such as greater out-of-pocket exposure for consumers and “value-based” purchasing by governments.  The authors seem to conclude that this era of slower growth will persist, but recent evidence suggests health spending may already be shifting into a higher gear.  One thing that is clear is that greater government involvement in health care and health spending is a dominating force in the level of health spending, and that is not likely a good thing.