The Effect of Health Care Cost Growth on the U.S. Economy. 2. Conceptual Overview of Potential Mechnisms Through Which Health Care Inflation Could Affect the Us Economy


Not surprisingly, the dramatic increases in health care spending and the share of GDP devoted to health care have raised concerns about the negative impact of health care cost inflation on the U.S. economy.  In an era of global economic markets, these concerns are reinforced by the status of the U.S. as a spending outlier among competing nations.  The major concern is that rapid increases in health care spending can affect major economic indicators such per capita GDP, employment and inflation. The effects are likely to occur across all sectors of the economy – governments, businesses and households – as all these interrelated sectors play an important role in the provision, financing and consumption of health care in the US. For example, Federal, state and local governments collect taxes from businesses and households to finance public health insurance programs and to directly provide health care to households. Businesses provide employment to US households and also provide health insurance to their employees. Households are the final consumers of health care and also bear some incidence of health care costs. In this report we separately identify the effects of health care costs on the aggregate economy and on each one of these interrelated sectors. However, it is important to note that the effects of health care costs on one sector are likely to affect outcomes in other sectors. For example, faced with rising health care costs governments might attempt to reduce health spending by reducing eligibility for public health insurance, consequently increasing uninsurance rates among households. The increase in health care costs might also prompt governments to raise taxes, increase borrowing or reduce investments in other critical sectors such as education and infrastructure, suppressing economic growth and affecting both businesses and households. Similarly, US companies faced with rapidly growing health care costs might reduce employment and investments in the US economy. Rising health care costs could also fuel inflation in the U.S. and make U.S. goods and services less competitive in international markets over time, because increasing health care costs might eventually be reflected in higher product prices.  Since most other nations do not have employer-sponsored health insurance, companies in those nations may be better able to keep prices low.2 Finally, high health care costs could reduce access to health care, bankrupt consumers and deplete retirement savings.

However, the view that rapidly rising health care spending harms the U.S. economy is not without dissenters, and some prominent economists view increases in health spending as having a neutral, or perhaps even a positive, economic effect.  For example, Pauly (2003) has argued that rising health care spending naturally results in rapid growth in the health care and related sectors, and in employment and incomes for workers in those sectors.  Notably, health care firms are largely U.S.-owned.  A related argument is that as total per capita GDP rises, consumers may choose to spend a higher portion of their income on health care consequently improving population health and productivity.

To summarize, rapidly rising health care spending could harm the economy by lowering GDP and employment, and increasing inflation (ASPE, 2005). But a contrary view suggests that health care spending has a neutral or positive effect on the economy by raising incomes and employment for workers in the health sector and by increasing the labor market productivity of workers. These and other potential mechanisms for the economic effects of health care spending are summarized in Table 1 below. The next section summarizes the peer-reviewed literature, anecdotal evidence, and survey findings that bear on both aggregate and sector-specific effects.

Mechanisms Underlying
Positive Effect on the Economy
Mechanisms Underlying Negative
Effect on the Economy
Table 1: Potential Mechanisms Through Which Health Care Spending
Could Affect the U.S. Economy
  • Improved capabilities of health care lead to better health and higher labor market productivity. Increase in labor productivity leads to increased wages and overall employment.
  • Increased incomes and employment in the health care sector and others who are affiliated with the health care sector.
  • US companies faced with higher health care costs reduce investments, raise prices, and lower employment. High health care costs also reduce the competitiveness of US firms in international markets.
  • Higher taxes to finance public health care expenditures suppress economic growth and reduce after-tax incomes of firms and households.
  • Increased government borrowing to finance public health care expenditures fuels inflation.
  • Governments faced with higher heath care costs reduce investment, in infrastructure and education.
  • If workers bear the incidence of higher health care spending, they have less income to spend on other goods and services. High health care costs could reduce access to health care, bankrupt consumers and deplete retirement savings.

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