Saturday, August 11, 2012

The Perfect Health Care Storm

A brief opinion by Gary Burtless of the Brookings Institute entitled "With Huge Health Care Costs, the U.S. Is a Huge Outlier" provides a few interesting facts about the level of health spending per person and the percentage of income that is devoted to the provision of health care in America.  With the announcement of spending and health care hawk Paul Ryan as GOP Vice Presidential candidate, the intense debate that surrounds the Affordable Care Act (ACA), the aging population and the growing level of public debt, this issue is not going to disappear any time soon, if it ever does.  With both of those in mind, I thought that it was time to take a look at just how much America is spending on its health care system, especially when compared to its peers.  Please note that in many cases, the most current data from the studies that I used is from 2009 even though the studies are well less than a year old.

Over the past four decades, the share of GDP that America spends on health care has widened when compared to other countries.  In the 1970s, the share of the American GDP that was devoted to health care was 40 percent higher than other wealthy countries.  This gap continued to widen and, by 2010, U.S. health spending was 70 percent higher than other economies with similar incomes, reaching 17.4 percent of GDP in 2009, up from 9 percent in 1980.

Here is a graph showing the per capita spending on health care for a variety of advanced economies showing how much of an "outlier" the United States really is:

U.S. spending on health in 2008 was 51 percent higher than Norway, its closest competitor and nearly double the average of $3923 for the 15 countries on the graph.

Here is a graph showing the public and private health care expenditures for all OECD nations, once again showing that the United States is by far the largest spender:

The 2009 average spending on health care for all OECD nations was 9.6 percent of GDP with the United States spending 5 percentage points more than the next two countries; the Netherlands (12.0 percent) and France (11.8 percent).

While this extra spending would be justified if it led to improved health outcomes, it does not appear that American health outcomes are any better than its OECD peer group.  On top of having high per capita spending, America's spending growth on health care is rising at a far faster rate than its peers as shown on this graph:

Here is a graph breaking down total spending on United States health care in 2009, showing how total spending of $2.486 trillion was $572 billion above expected spending when compared to healthcare expenditures in other developed economies:

These extra expenditures were based largely on comparably higher outpatient care costs, drug costs and health administration and insurance

When adjusted for inflation, cumulative real per capita spending on health care has grown by 4.9 times as much as GDP since 1960 as shown on this graph:

While the Great Recession did slow down the growth rate in spending on health care, certain categories saw very small reductions in spending growth, particularly long-term and home care and outpatient care as shown on this graph:

With the first baby boomers hitting their mid-60s this year, unless the upcoming senior cohort is willing to live in squalor, eat cat food and change their own Attends, annual spending growth of only 6.6 percent on long-term and home care is going to seem positively reasonable.

What is particularly concerning about all of this is that spending on American health care is showing no sign of slowing down at the same time as rising debt levels of government is showing no sign of slowing down.  Washington relies very heavily on individual income taxes with nearly 85 percent of its revenue coming from the voting masses.  With personal income growth stalling and people leaving the workforce in droves either out of frustration or because they are retiring, unless Washington feels like committing political suicide by raising personal taxation levels, revenue levels will not grow at the pace needed to fund health care costs that are rising at 7 percent annually ad infinitum.

Is it just me or does it look like America could well be entering the perfect health care storm?  Two things are obvious, first, the current scenario is not sustainable and second, this issue alone will make it extremely difficult for Washington to cut its outlays.


  1. It looks dire, but I think the tide is turning. Finally, the heads of both parties have their respective ideas for the beginning of cost containment. However, the rank and file politicians will still opportunistically use any change to Medicare as a bludgeon on an opponent. I actually expect some progress next year, which luckily isn't an election year. (Lots more short posts on healthcare here.)

  2. Has anyone done an analysis that explains why the U.S. is spending so much more on health care on a per capita and as a percentage of GDP basis? I come from the land of free health care (my family monthly premiums for a drug and hospitalization top-up are just over $100) and I see that our costs are less than 60 percent of American costs. Sure, we have our death panels and set elderly Canadians adrift on ice floes but other than that, what is the difference? (just kidding) (I think).

    I know that we have our horror stories about waiting times but, from my personal perspective and experience, when we really need the system, it is there for us in a very timely fashion. Is it possible that someone, somewhere within the American medical system is making a huge profit on the backs of taxpayers?

    1. From what I've been able to piece together, healthcare is more lucrative in the US, for doctors, nurses, pharmaceutical companies, and medical equipment manufacturers. We also spent more on administrative cost and sales/marketing costs.

      One reason these costs have gotten so high is that there has been also no brake on medical consumption since costs are largely handed off to third parties (but maybe this is true in countries with socialized medicine too).

    2. The US is all about profits, and healthcare is archetypical of this mindset. Pretty much everyone along the line extracts their pound of flesh, particularly the health insurers.

      A single payer would help. Good luck on trying to get rid of private insurers, the doc overtesting , the provider and pharma interests. Teeth would gnash, dollars would flow...

    3. I dispute the notion that due to healthcare being paid for by a third party, we consume too much healthcare. I've not seen any evidence to support that. After all, in country after country, the system is either free healthcare (ie; UK), single payer (ie; Canada, Japan) or private regulated insurance (Germany). Its all "third party payers". People are free to consume healthcare without limits. Nonetheless, the cost of care is far less. The difference is that in those places the market is NOT fee. The people vis-a-vis their governments simply say here's what you get. Take it or leave it.

  3. Perhaps it should also be mentioned that the health related outcomes such as average life span in the US are worse than most other OECD countries.