The Effect of Health Care Cost Growth on the U.S. Economy. 1. Introduction

09/01/2007

The rate of growth in health care spending in the U.S. has outpaced the growth rate in the gross domestic product (GDP), inflation, and population for many years.  Between 1940 and 1990, the annual rate of growth in real health spending per capita ranged from 3.6% in the 1960s to 6.5% in the 1990s.  Correspondingly, the share of GDP accounted for by health care spending rose from 4.5% in 1940 to 12.2% in 1990.  In 2005 health care spending was nearly $2 trillion, or $6,697 per capita, which represents 16% of GDP (Catlin et al., 2007). The sustained increase in U.S. health spending over the previous four and half decades is likely to continue, and total spending on health is projected to reach $4 trillion, 20% of GDP, by 2015.


Figure 1: Richer Countries Spend More on Health Care: the United States Is a Clear Outlier
Total health care spending per capita, 2000 (U.S.$ PPP),0--3900 versus GDP per capita,2000 (U.S.$PPP), 6,000--45,000. Uk--1900/25,000;Italy--2,000/25,000;Japan--2,000/26,000; France---2200/26,000; Germany---2500/26,000; Canada--2300/28,000;Iceland---2400/28,000;Norway--2200/30,000; Luxemburg--2500/42,000; Switzerland--3200/30,000; United States--4700/35,000.Note: 1999 data for Luxemburg and Polan; 1998 data for Sweden and Turkey; PPP=Purchasing Power parity.

Total health care spending per capita, 2000 (U.S.$ PPP),0--3900 versus GDP per capita,2000 (U.S.$PPP), 6,000--45,000. Uk--1900/25,000;Italy--2,000/25,000;Japan--2,000/26,000; France---2200/26,000; Germany---2500/26,000; Canada--2300/28,000;Iceland---2400/28,000;Norway--2200/30,000; Luxemburg--2500/42,000; Switzerland--3200/30,000; United States--4700/35,000.Note: 1999 data for Luxemburg and Polan; 1998 data for Sweden and Turkey; PPP=Purchasing Power parity.


These figures make the U.S. a clear outlier in international comparisons of health care spending.  For example, per capita spending in the U.S. exceeds the level in the next closest country by more than 50% (Figure 1).  Similarly, the share of GDP devoted to health care in the U.S. surpasses that in other developed nations by a wide margin.1

This sustained increase and high level of spending on health care in the United States has been the subject of discussion and scrutiny for several decades. Concern has intensified recently as both research studies and anecdotal reports suggest that continued rapid growth in spending may harm the U.S. economy.     

Investigating this potential link is not a straightforward effort.  Health care spending affects the economy in diverse and complex ways, and effects may differ across sectors of the economy and population groups.  For example, commentators have noted that although health care spending may hamper broad economic growth, it may also stimulate economic growth and prosperity in certain sectors of the economy.  Understanding how health care spending affects economic growth requires an assessment of these numerous dimensions.

This report presents findings from an evaluation of the effect of health care cost growth on the U.S. economy, based on – 1) a thorough and systematic review of the existing literature, anecdotal evidence and survey findings, and 2) limited quantitative analyses of available secondary data sources. We examine key indicators of economic well-being including per capita GDP and employment; we also describe the effects of health care costs growth on two other sectors of the economy - employers/businesses and government. Our discussion is organized as follows.

  • Section 2 presents various perspectives on how growth in health care spending affects the US economy.
  • Section 3 summarizes the review of the literature, focusing on the mechanisms through which health care spending could affect the U.S. economy, including aggregate economic outcomes, employers, the government, households, and local economies.
  • In section 4, available state-level data are used to analyze the effects of health care cost growth on aggregate economic indictors, industries, and state governments. Section 5 summarizes the main findings.

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