Health Care Spending: Past Trends and Projections

Health Care Spending: Past Trends and Projections

Order Code RL31094
Health Care Spending:
Past Trends and Projections
Updated June 17, 2005
name redacted
Analyst in Social Legislation
Domestic Social Policy Division

Health Care Spending: Past Trends and Projections
Summary
This report focuses on trends in personal health care spending, which includes
spending on health care goods and services provided to individuals and excludes
expenditures for administrative costs, research, and public health activities. Personal
health care expenditures have grown considerably over the past 40 years. Between
1960 and 2003 (the most recent year available), personal health care spending
increased from $23.4 billion to $1.4 trillion. It is estimated that personal health
spending will exceed $3.1 trillion in 2014.
Data on health expenditures suggest four important trends. First, during the
1990s, health spending has grown at lower rates than in the past. However, from
2000 to 2003 health spending grew at higher rates than the previous decade. Second,
health care spending as a percent of gross domestic product (GDP) was relatively
constant between 1992 and 2000. Health spending as a percent of GDP increased in
2001, 2002 and 2003, indicating that health expenditures are growing faster than the
overall economy. Third, four types of health services consistently compose the bulk
of health care expenditures: hospital care, physician and clinical services, nursing
home and home health care, and prescription drugs. Spending on prescription drugs
has grown since 1980 and is projected to continue growing during the next decade.
Fourth, over the past 40 years, the primary financing of health care has shifted from
out-of-pocket payments to payments by private insurance and the federal
government.

Contents
Growth in Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Health Spending and Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Spending on Specific Categories of Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Who Pays for Health Care? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Figures
Figure 1. Growth in Nominal Personal Health Care Expenditures . . . . . . . . . . . . 3
Figure 2. Factors Influencing Growth in Nominal Personal Health
Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Figure 3. Personal Health Care Spending as a Percent of Gross Domestic
Product (GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 4. Major Categories of Personal Health Care Spending as a Percent of
Total Personal Health Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 5. Source of Payment for Personal health Care as a Percent of Total
Personal Health Care Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. 2003 Health Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Health Care Spending:
Past Trends and Projections
Growth in Spending
In 2003 (the most recent year available), over $1.7 trillion was spent on health
care and health-related activities.1 Table 1 indicates how this amount was spent.
Data on national health expenditures include spending on a broad range of health-
related activities. A small portion of 2003 health expenditures (about $238 billion,
or 14%) was spent on administrative costs, net cost of private health insurance,2
government public health activities, research,3 and construction. However, the vast
majority of 2003 health expenditures was spent on personal health care. Personal
health care includes goods and services provided to individuals to treat or prevent
medical conditions. The remainder of this report will focus on personal health care
expenditures.
Spending on personal health care continues to increase every year. Between
1960 and 2003, expenditures for personal health care grew from $23.4 billion to $1.4
trillion; in 2014, personal health care spending is projected to exceed $3.1 trillion.
Figure 1 tracks past and projected growth rates of personal health care spending in
nominal terms (i.e., not adjusted for inflation). From the beginning of 1994 to the
end of 1999, health spending increased at an average annual rate of 5.4%. This low
growth is attributable to changes in both the private and public sectors. In the private
sector, the increased use of managed care limited cost growth during the mid-1990s.
Vigorous fraud-and-abuse investigation and the Balanced Budget Act of 1997 (which
slowed growth in hospital, home health, and nursing home payments) constrained
health expenditures in the late 1990s.4 The effects of these changes in public and
private sector have subsided. Personal health expenditures have increased at an
average annual rate of 8.2% from 2000 to 2003. Yet, looking from a broader
1 All dollar figures cited in this report were obtained from the Centers for Medicare and
Medicaid Services (CMS), Office of the Actuary. All percentages were calculated by
Congressional Research Service (CRS) using data from CMS.
2 Net cost of private health insurance is equal to the difference between all premiums paid
to insurance providers minus what insurance providers must pay for the provision of health
care to its members.
3 Research excludes amounts spent by pharmaceutical manufacturers, medical equipment
suppliers, and other companies. Expenditures on research and development by such entities
are implicitly included in the spending figures for other categories, e.g., prescription drugs
and durable medical equipment.
4 Levit, Katharine, Cynthia Smith, Cathy Cowan, Helen Lazenby, and Anne Martin, Inflation
Spurs Spending in 2000. Health Affairs. vol. 21, no. 1, Jan./Feb. 2002.

CRS-2
historical perspective, spending growth in 2002 was still much lower than that in
most years since 1960 (see Figure 1). In particular, the years 1979 through 1981
experienced growth rates between 13.8% and 16.1%. Between 2004 and 2014,
personal health care spending is projected to increase at an average rate of about
7.7% per year.
Table 1. 2003 Health Expenditures
Increase
Percent
over 2002
increase
Amount
spending
over 2002
Type of Expenditure
($ billions)
($ billions)
spending
Personal health care expenditures:
Hospital care
$515.9
$31.7
7.3%
Physician and clinical services
$369.7
$29.0
8.5%
Long-term care:
Nursing home care
$110.8
$4.2
4.0%
Home health care
$40.0
$3.5
9.5%
Prescription drugs
$179.2
$17.4
10.7%
Dental services
$74.3
$3.4
4.8%
Other professional services
$48.5
$2.4
5.3%
Non-durable medical goods (excluding
prescription drugs)
$32.5
$1.4
4.4%
Durable medical goods
$20.4
$0.8
4.0%
Other personal health care
$49.5
$4.2
9.2%
Total personal health care expenditures
$1,440.8
$97.9
7.3%
Government administration and net cost of
private health insurance
$119.7
$14.0
13.2%
Government public health activities
$53.8
$3.0
5.1%
Research
$40.2
$3.7
10.0%
Construction
$24.5
$1.7
7.7%
Total national health expenditures
$1,678.9
$119.9
7.7%
Source: Prepared by the Congressional Research Service (CRS) based on data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.

CRS-3
Figure 1. Growth in Nominal Personal Health Care Expenditures
18%
16%
14%
12%
Actual
Projected
10%
8%
6%
4%
2%
0%
960
965
970
975
980
985
990
995
000
005
010
1
1
1
1
1
1
1
1
2
2
2
Year
Source: CRS calculations using data from the Centers for Medicare and Medicaid Services, Office
of the Actuary.
A combination of factors can cause nominal spending to increase: rising prices,
population growth, increases in the quantity of medical services each person receives,
advances in medical knowledge and technology, and other factors. Expenditures
attributable to non-price factors are often referred to as “real” spending. Growth in
real spending represents a quantitative and qualitative increase in the level of medical
care that individuals are receiving and can indicate an improvement in the
population’s standard of living.5 Conversely, increases in health care expenditures
attributable to higher prices represent only a pecuniary transfer from the payer to the
providers and manufacturers of medical goods and services. Figure 2 depicts the
share of nominal spending growth attributable to increases in medical care prices,
increases in population, and increases in per capita real health expenditures (what
some experts describe as the “intensity” of care). For much of the time period shown
in Figure 2, prices played a larger role in nominal spending increases than population
or non-price factors (e.g., improved medical technology or higher utilization).
During the late 1990s, medical care prices, constrained by managed care, grew at
lower rates than in any other year shown. Price growth is projected to increase
during the next decade, though not to the high levels experienced during the 1970s
and 1980s.
5 In general, higher consumption of goods and services (medical and non-medical alike) is
usually viewed as improving the standard of living for an individual. However, some
experts might argue that higher utilization is not always indicative of a higher standard of
living. For example, an outbreak of a contagious disease would increase the utilization of
health services, yet no one would claim that those infected would have a higher standard of
living.

CRS-4
Figure 2. Factors Influencing Growth in
Nominal Personal Health Expenditures
18%
16%
14%
Actual
Projected
12%
10%
8%
6%
4%
2%
0%
60
65
70
75
80
85
90
95
00
05
10
19
19
19
19
19
19
19
19
20
20
20
Year
Increase in Medical Care Prices
Increase in Real Personal Health Care Spending (Per Capita)
Increase in Population
Increase in Nominal Personal Health Expenditures
Source: The Congressional Research Service (CRS) calculations using data from the U.S. Census
Bureau and the Centers for Medicare and Medicaid Services, Office of the Actuary.
Note: To make component factors additive, percentages in this figure represent continuous growth
rates rather than discrete annual changes. Continuous growth rates can be converted to discrete yearly
changes using the formula: [(annual change)=exp(continuous rate)-1].
However, currently available price indexes may not accurately reflect changes
in medical care prices. Ideally, a price index would measure only how much must
be paid this year to receive the same level of care as that received in some base
period, holding quality constant. But it is difficult to hold the quality of care constant
over time considering the rate of medical advances. For example, heart surgeries
today are of higher quality than those performed in the past, as measured by survival
rates. Yet, price indices tend to treat both procedures as equal in quality. Thus,
measures of increases in the price of heart surgeries capture both pure price increases
as well as quality increases, which violates the basic principle of price indexes. By
including quality effects in price measures, price indexes tend to overstate true
increases in medical prices.6
6 For more information, see Ernst R. Berndt et al., “Price Indexes for Medical Care Goods
and Services: An Overview of Measurement Issues,” in David M. Cutler and Ernst R.
Berndt, Medical Care Output and Productivity (Chicago: The University of Chicago Press,
2001).

CRS-5
Health Spending and Gross Domestic Product
Personal health expenditures as a percent of GDP have risen since 1960. This
trend has two implications: (1) personal health care spending is growing faster than
the overall economy, and (2) a larger share of the nation’s economic resources is
being devoted to providing medical goods and services to the population. Figure 3
depicts past and projected personal health care spending as a percent of GDP. In
1960, personal health care expenditures were about 4% of GDP; in 2003, they were
13%. Much of this growth occurred between 1960 and 1991. Between 1992 and
2000, personal health expenditures as a percent of GDP remained between 11.5% and
11.7%. This relative constancy indicates that expenditures were growing at about the
same rate as the overall economy. In 2001, however, personal health care
expenditures grew to 12.3% of GDP, an indication that personal health care spending
grew faster than the overall economy in that year. It is projected that personal health
care spending will continue to grow faster than the overall economy, accounting for
almost 16% of GDP in 2014.
Figure 3. Personal Health Care Spending as a Percent of
Gross Domestic Product (GDP)
18%
Actual
Projected
16%
14%
12%
10%
8%
6%
4%
2%
0%
60
65
70
75
80
85
90
95
00
05
10
19
19
19
19
19
19
19
19
20
20
20
Year
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.

CRS-6
Spending on Specific Categories of Health Care
Of the total amount spent on personal health care, the largest categories of
expenditures tend to be hospital care, physician and clinical services, nursing home
and home health care, and prescription drugs. The contribution of these four
categories to personal health spending has remained fairly constant, averaging 84%
of total personal health care spending over the last four decades. However, the
relative sizes of these categories have changed over time. Figure 4 depicts past and
projected spending on each of these categories as a percent of personal health care
spending. Expenditures on hospital care, as a percent of personal health spending,
have decreased from 47% in 1980 to 36% in 2003. They are projected to decrease
further in the future. This trend indicates that spending on hospital care is growing
at a slower rate than spending on other categories of personal health care. Spending
on prescription drugs as a percent of personal health care spending has increased
from 6% in 1980 to 12% in 2003. It is projected to continue increasing through the
next decade. Such a trend indicates that spending on prescription drugs is rising faster
than other categories of personal health care. Figure 4 probably underestimates the
impact of prescription drugs on personal health care expenditures. Data on drug
spending reflect prescription drugs obtained from retail pharmacies, but it excludes
drugs provided by institutional pharmacies. Drugs dispensed to patients from a
hospital or nursing home pharmacy are excluded from the prescription drug category.
Instead, spending on drugs dispensed from institutional pharmacies is implicit in the
amount spent for services at the respective institutions (e.g., hospital services or
nursing home care).
Figure 4. Major Categories of Personal Health Care Spending as a
Percent of Total Personal Health Expenditures
50%
44%
47%
42%
39%
40%
36%
30%
26%
26%
23%
22%
22%
20%
12%
11%
11%
9%
10%
9%
10%
7%
4%
6%
7%
0%
1960
1970
1980
1990
2008
Hospital Care
Physician and Clinical Services
Nursing Home and Home Health Care
Prescription Drugs
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.

CRS-7
Who Pays for Health Care?
Direct payments for personal health care come from five general sources:
consumer payments out-of-pocket, payments by private insurance companies, federal
funds, state and local funds, and “other” private funds. Out-of-pocket payments
include payments by those without health insurance. Out-of-pocket payments also
include payments by the insured for deductibles, coinsurance, and costs not covered
by insurance (excluding premiums). “Other” private funds consist mostly of
philanthropic contributions to the health care system.
Ultimately, all health care spending is paid for by individuals through direct
payments, cost-sharing, insurance premiums,7 taxes, and charitable contributions.
However, most of these payments are redistributed; what a person pays does not
necessarily reflect how much health care that person receives. One who pays
relatively high taxes might not have any of their health care financed by the
government. Similarly, there are some people who pay health insurance premiums,
yet use less care than the sum of the premiums paid. Only when individuals pay
directly for the cost of treatment (either because they are uninsured or because they
have not met their deductible) do personal expenditures directly reflect the amount
of care received.
Figure 5 shows the percent of personal health care spending attributable to each
source. In 1960, 55% of all personal health care was financed out-of-pocket, whereas
private insurance paid for 21% and the federal government paid for 9%. In 2003,
only 16% of personal health care was paid out-of-pocket while private insurance paid
for 36% and the federal government paid for 33%. Much of the increase in the
federal government’s share of health spending occurred during the 1960s, when the
Medicare and Medicaid programs were introduced. The increase in the federal
government’s share of payments during the 1990s is likely due to the ability of
private insurance to reduce its share of expenditures through managed care.
Furthermore, during this period, there was a dramatic increase in the quality and cost
of health services.
7 Even if the employer is contributing all or a portion of the insurance premium, individual
workers generally accept lower wages in exchange for this benefit. Thus, they pay for
employer contributions to health care in the form of reduced wages that are lower than what
they would otherwise be paid if the employer offered no health benefits.

CRS-8
Figure 5. Source of Payment for Personal health Care as a
Percent of Total Personal Health Care Expenditures
Source: Congressional Research Service (CRS) calculations using data from the Centers for Medicare
and Medicaid Services, Office of the Actuary.

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