Year-over-year changes in U.S. healthcare spending reflect shifting demand for services and their underlying costs, changes in the healthiness of the population and the regulatory framework in which the U.S. health system operates to receive payments. Fluctuations are apparent year-to-year, but a multiyear retrospective on health spending is insightful in understanding the big picture.
An Eventful 21 Years for U.S. Healthcare
The period from 2000 to 2021 (the last year for which U.S. spending data is available) spans two economic downturns (2008–2010 and 2020–2021); four presidencies; shifts in the composition of Congress, the Supreme Court, state legislatures and governors’ offices; and the passage of two major healthcare laws (the Medicare Modernization Act of 2003 and the Affordable Care Act of 2010). During this time span, there were notable changes in healthcare spending, according to the Centers for Medicare & Medicaid Services’ National Healthcare Expenditure data:
- National health expenditures were $1.366 trillion (13.3% of gross domestic product) in 2000 and $4.255 trillion in 2021 (18.3% of the GDP). This represents a 210% increase in nominal spending and a 37.5% increase in the relative percentage of the nation’s GDP devoted to healthcare. No other sector in the economy has increased as much.
- In the same period, the population increased 17% from 282 million to 334 million, as per capita healthcare spending increased 166% from $4,845 to $12,914. This disproportionate disconnect between population and health spending growth is attributable primarily to unit costs in healthcare—the prescription drugs, facilities, technologies and specialty provider costs that escalate faster and higher than costs in other industries. Economists have observed that supply-induced demand and lack of competition are major contributors to the health-cost spiral.
- There were notable changes where dollars were spent: Hospitals remained relatively unchanged (from $415 billion/30.4% of total spending to $1.323 trillion/31.4%), while physician services shrank (from $288.2 billion/21.1% to $664.6 billion/15.6%). Prescription drugs also remained unchanged (from $122.3 billion/8.95% to $378 billion/8.88%), whereas public health spending increased slightly (from $43 billion/3.2% to $187.6 billion/4.4%).
- There were also striking differences in sources of funding: Out-of-pocket spending shrank from $193.6/14.2% of payments to $433 billion/10.2%, and private insurance shrank from $441 billion/32.3% to $1.21 trillion/28.4%. Conversely, Medicare spending grew from $224.8 billion/16.5% to $900.8 billion/21.2%; Medicaid and the Children’s Health Insurance Program spending grew from $203.4 billion/14.9% to $756.2 billion/17.8%; and Department of Veterans Affairs healthcare spending grew from $19.1 billion/1.4% to $106 billion/2.5%.
These data point to a problematic trend: The healthcare economy is increasingly dependent on indirect funding by taxpayers and less dependent on direct payments by users. During the last 20 years, local, state and federal government programs like Medicare and Medicaid have become the major sources of healthcare funding. Direct payments by consumers, vis-à-vis premium and out-of-pocket costs, have not kept up with medical inflation and utilization and contribute less in the aggregate. As the population ages (people who are 65 and older increased 29% from 44 million/12.4% of the population in 2000 to 57 million/17.1% of the population in 2021), the burden for funding healthcare will increasingly shift to the working-age population and their employers, who pay the bulk of taxes.
The Big Picture
These data present a perplexing and immediate challenge for healthcare policymakers and government officials for the following two reasons:
- Allocation. How should funds be spent to achieve optimal value in the health economy? Public health programs that address social determinants of health (food insecurity, loneliness, unsafe housing, etc.) for underserved populations receive less than 5% of U.S. health economy spending but account for up to 70% of its costs. Investments in primary and preventive health reduce demand and mitigate more expensive specialty care, but the majority of the health economy’s funds go elsewhere.
- Sourcing. Where should health economy funding come from? The National Healthcare Expenditure data show the health economy is increasingly dependent on government sources for its funding as out-of-pocket and private insurance payments shrink. As the health economy competes for public funds against education, transportation and environmental safety, will it merit taxpayer confidence in its stewardship? Or will those with connections to financial sources, such as private equity, drive innovations accessible only to those to whom a shareholder return is expected?
Healthcare is expected to consume 20% of the nation’s GDP by 2030, owing to high unit costs, medical inflation and increased utilization. Affordability, price transparency and equitable access to care will be prominent issues in the 2024 election cycle as criticism mounts regarding hospital consolidation and business practices in not-for-profit settings. This means the healthcare economy will face intense scrutiny to justify the oversized role it plays.
Paul H. Keckley, PhD, is managing editor of The Keckley Report (pkeckley@paulkeckley.com).