The Increasing Cost of Health Care - How Much Does Health Care Cost?

American society places a high value on human life, and generally wants—and expects—quality medical care. But quality care comes with an increasingly high cost. In 1970 the United States spent 7% of its gross domestic product (GDP; the value of all the goods and services produced by the nation) on health care. By 1999 health care had risen to 13% ($1.2 trillion) of the GDP, and in 2001 health care expenditures reached 14.1% ($1.4 trillion) of the GDP. Table 5.1 shows the growth in health care expenditures, the growth in the GDP, and the annual percent change from the previous year for the years from 1960 to 2001.

For many years the consumer price index (CPI; a measure of the average change in prices paid by consumers) increased at a greater rate for medical care than for any other commodity. From 1980 to 1990 the average annual increase in the overall CPI was 4.7%, while the average annual increase in the medical care index stood at 8.1%. By 1998 the average annual growth in the medical care index had fallen to 3.3%, but in 2002 it had risen again to 4.7%. The medical care index has consistently outpaced the CPI in each decade. Of all the components of health care delivery, the sharpest price increases in 2002 were in hospital outpatient services at 10.2%. (See Table 5.2.)

The Centers for Medicare & Medicaid Services (CMS was formerly known as the Health Care Financing Administration or simply HCFA), an agency of the U.S. Department of Health and Human Services (HHS), have projected that the national health expenditure will grow to $3.4 trillion by 2013, almost twice as much as the 2004 projection of $1.8 trillion. (See Table 5.3.) (Since the numbers in Table 5.3 are projections, they necessarily differ from the actual numbers presented in some other tables and figures.) Medicare was projected to reach $532.1 billion by 2013 and be responsible for almost 16% of all health care expenditures.

Generally, projections are most accurate for the near future and least accurate for the distant future. For example, predictions for 2030 should be viewed more cautiously than predictions for 2006. Since it is unlikely that the conditions on which the projections were based will remain the same, the HCFA cautioned that its projections should not be viewed as predictions for the future. Rather, they were intended to help policymakers evaluate the costs or savings of proposed legislative or regulatory changes.

Total Health Care Spending

The Center for Medicare & Medicaid Services, along with the Centers for Disease Control and Prevention (CDC) and the General Accounting Office (GAO), maintain most of the nation's statistics on health care costs. The CMS reported that the United States spent nearly $1.6 trillion for health care in 2002, up 9.3% from the previous year. (See Table 5.4.) This rate was higher than the lowest rates of increase since the late 1960s, which were documented in 1998 and 1999, but was not among the highest annual increases observed, such as the 11.7% rise in 1990.

About 54.1% of 2002 health care expenditures, or $839.6 billion, came from private funds, while the remaining 45.9% ($713.4 billion) was paid with public money. (See Table 5.4.) This means that 54 cents of every dollar spent on health care came from private funds, and the remainder came from federal (32.5 cents) or state and local governments (13.4 cents). The 2002 per capita cost for health care (the average per individual if spending was divided equally among all persons in the country) was $5,440. (See Table 5.4.)

A comparison of the sources of funds spent on health care in 1998 and 2002 reveals few significant changes. During 2002 private insurance paid slightly more than 2% more and Medicaid just over 1% more for health care services, and Americans' out-of-pocket expenses decreased by 1.5% from 1998. (See Table 5.3.)

TABLE 5.1

National health expenditures in comparison to gross domestic product and government expenditures, selected years 1960–2001
[Data are compiled from various sources by the Centers for Medicare & Medicaid Services]
Gross domestic product, government expenditures, and national health expenditures	1960	1970	1980	1990	1995	1998	1999	2000	2001
— Category not applicable.
Notes: These data include revisions in health expenditures and differ from previous editions of Health, United States. They reflect U.S. Bureau of the Census resident population estimates as of July 2002. Federal and State and local government total expenditures reflect October 2002 revisions from the Bureau of Economic Analysis.
SOURCE: "Table 112. Gross Domestic Product, Federal and State and Local Government Expenditures, National Expenditures, and Average Annual Percent Change: United States, Selected Years 1960–2001," in Health, United States, 2003, National Center for Health Statistics, 2003, http://www.cdc.gov/nchs/data/hus/tables/2003/03hus112.pdf (accessed July 2, 2004)
	Amount in billions
Gross domestic product (GDP)	$527	$1,040	$2,796	$5,803	$7,400	$8,781	$9,274	$9,825	$10,082
Federal government expenditures	85.8	198.6	576.6	1,228.7	1,575.7	1,705.9	1,755.3	1,827.1	1,936.4
State and local government expenditures	38.1	107.5	307.8	660.8	902.5	1,033.7	1,105.8	1,196.2	1,292.6
National health expenditures	26.7	73.1	245.8	696.0	990.1	1,150.0	1,219.7	1,310.0	1,424.5
Private	20.1	45.4	140.9	413.5	532.5	628.4	669.7	718.7	777.9
Public	6.6	27.6	104.8	282.5	457.7	521.6	550.0	591.3	646.7
Federal government	2.8	17.6	71.3	192.7	323.5	368.7	386.2	415.1	454.8
State and local government	3.8	10.0	33.5	89.8	134.2	152.9	163.8	176.2	191.8
	Amount per capita
National health expenditures	$143	$348	$1,067	$2,738	$3,697	$4,178	$4,392	$4,672	$5,035
Private	108	216	612	1,627	1,988	2,283	2,411	2,563	2,749
Public	35	131	455	1,111	1,709	1,895	1,980	2,109	2,286
	Percent
National health expenditures as percent of GDP	5.1	7.0	8.8	12.0	13.4	13.1	13.2	13.3	14.1
	Health expenditures as a percent of total government expenditures
Federal	3.3	8.9	12.4	15.7	20.5	21.6	22.0	22.7	23.5
State and local	9.9	9.3	10.9	13.6	14.9	14.8	14.8	14.7	14.8
	Percent distribution
National health expenditures	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
Private	75.2	62.2	57.3	59.4	53.8	54.6	54.9	54.9	54.6
Public	24.8	37.8	42.7	40.6	46.2	45.4	45.1	45.1	45.4
	Average annual percent change from previous year shown
Gross domestic product	—	7.0	10.4	7.6	5.0	5.9	5.6	5.9	2.6
Federal government expenditures	—	8.8	11.2	7.9	5.1	2.7	2.9	4.1	6.0
State and local government expenditures	—	10.9	11.1	7.9	6.4	4.6	7.0	8.2	8.1
National health expenditures	—	10.6	12.9	11.0	7.3	5.1	6.1	7.4	8.7
Private	—	8.5	12.0	11.4	5.2	5.7	6.6	7.3	8.2
Public	—	15.4	14.3	10.4	10.1	4.5	5.4	7.5	9.4
Federal government	—	20.1	15.0	10.5	10.9	4.5	4.7	7.5	9.6
State and local government	—	10.2	12.8	10.4	8.4	4.4	7.2	7.5	8.9
National health expenditures, per capita	—	9.3	11.9	9.9	6.2	4.2	5.1	6.4	7.8
Private	—	7.2	11.0	10.3	4.1	4.7	5.6	6.3	7.3
Public	—	14.0	13.2	9.3	9.0	3.5	4.5	6.5	8.4

Of the more than $1.5 trillion spent on health care in 2002, $1.3 trillion (89%) was spent on personal health services (expenses incurred by individuals as opposed to institutions). Some of the services included hospital care, physician and dental services, nursing and home health care, prescription drugs, and durable medical equipment. (See Table 5.5.)

Table 5.5 shows the trends and annual percent changes in personal health care expenditures by category. In 2002 the nation spent $501.5 billion on professional services, by far the largest chunk of health care spending, followed by $486.5 billion (about 32% of all health expenditures) on hospital costs. This expense was followed by $339.5 billion for physician and clinical services, $162.4 billion for prescription drugs, and $103.2 billion for nursing home care. (See Table 5.5.) Figure 5.1 shows general percentages for how much was paid for medical spending in 2002.