The Effect of Health Care Cost Growth on the U.S. Economy. Is Increased Spending on Health Care Sustainable?


By 2014, 18.7% of GDP could be spent on health care (Heffler et al., 2005); this could rise to 27% of GDP by 2040 (Warshawsky, 1999). Is such a high share of spending on health care affordable or sustainable?

 Research suggests that health care spending growth is sustainable only up to a one percentage point gap between the growth rates of health spending and GDP. Follette & Sheiner (2005) propose that health care spending growth is sustainable if increases in health care spending do not lead to an absolute decline in real per capita non-health care consumption. They use a simple macroeconomic model to forecast health care and non-health care consumption under alternative assumptions about the growth of health care spending. In their simulations they assume that the growth rate of GDP, government expenses, current account balance, and gross investments follow historical trends. The baseline scenario assumes that per capita health care spending grows one percentage point faster than per capita GDP. Under this assumption, health care spending growth is sustainable for the next 75 years. However, per capita health care spending that grows two percentage points faster than per capita GDP will lead to a decline in non-health consumption by 2040 and will leave no resources for non health care consumption in 75 years. Chernew, Hirth and Cutler (2003) reach similar conclusions - a one percentage point gap between real per capita growth in health care costs and growth in GDP would be affordable through 2075, and a two percentage point gap would be affordable through 2039.

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