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Another Perspective on National Health Spending

By August 22, 2016Commentary

Health spending accounts for about 17.5% of all US national production and about 14% of American workers are employed in health care.  Research in Health Affairs decomposes this spending into categories.  (HA Article)   The authors looked at hospitals, physician offices and outpatient care centers and attempted to identify where the revenues received by these health care providers went–what were the costs they incurred in providing services.  The costs include materials, supplies and goods used; labor costs, capital expenses, taxes and any surplus of revenue over these amounts.  In 2012, the year the data was derived for, personal health consumption spending was about 84% of total US health spending and the authors were able to decompose about 60% of that spending.  Revenues exceeded spending by about 10% across the three provider settings studied.  About half of revenue went to paying labor costs.  23% of total revenue went to compensation for doctors and nurses.  Other health care clinicians and support staff accounted for 12% of revenue and non clinical staff, like IT staff and management, accounted for 15% of revenue.

The next significant category was intermediate or purchased goods and services costs, accounting for 35% of all revenue.  Medical supplies were about a third of this amount, external services 30% and other operating costs were 31%.  Around 37% of purchased services were for professional and technical services, like legal and accounting.  5% of total spending went to capital investments.  Hospitals spent a little less on labor than did physician offices, while hospitals spent more on intermediate goods and services.  From 2001 to 2012, expenses grew slightly slower than revenues for physician offices and hospitals, while expenses rose faster than revenues for outpatient care centers.  Intermediate costs have been the fastest growing cost category for providers over the last 15 years, at 118% and this rapid growth means they know account for 36% of expenses.  Labor costs have more closely tracked revenue growth.  But higher paid health care professions have grown faster in terms of employment than have less well paid positions.  So one positive from a larger economic perspective is that while health care takes a lot of our spending, it also provides many relatively high-paying jobs.  What is very apparent is that if you want to slow health care spending, you have to control labor costs, which are half of providers’ expenses in providing services.  That means either people get paid less or they become much more productive.

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