The Real Crisis in Healthcare Expenditure Growth

In 2011 the U.S. spent an estimated $2.7 trillion on healthcare, accounting for just under 20% of our total GDP. This figure–and projections of future growth in healthcare spending–is being described in terms of a mounting national crisis. (Healthcare spending is a “national threat”, according to the CBO.) Healthcare spending is growing far faster than our national GDP, and far faster than individual incomes. This is growth, not a crisis. Something that, given the feeble state of our economy, we could be glad for. But there is a looming crisis…

Healthcare expenditures outstripping income reflects two realities: 1) individuals are choosing to spend more of their income on healthcare (which could be explained, at least in part, by an increase in the quality and availability of healthcare). 2) The increase in healthcare expenditures, in part, has hampered wage growth. That is, since most health insurance is paid for by employers, and because the cost of providing health insurance has increased rapidly in recent years, a portion of compensation increases have been allocated to paying for employee health insurance, rather than taxable income. Since income does not account for non-monetary compensation (i.e. benefits, including health insurance), growth in taxed earnings has lagged behind real wage growth.

The growth of healthcare expenditures, in and of itself, isn’t a bad thing. Increased expenditures are due to 1) increased consumption and 2) higher costs. Increased consumption results from an aging population, but also from improved quality and availability of healthcare. Higher costs, in turn, are explained in part by increased administrative costs, but also by also better (albeit more expensive) treatments.

In the face of sluggish national growth, rapid growth in the healthcare sector should, seemingly, be celebrated (at least one sector of our economy is booming!). That the healthcare sector is growing faster that our overall economy simply indicates that individuals are choosing to spend more of their income on healthcare (and less on other things). (And for those who worry that we’re not getting our money’s worth, I would refer to to Scott Atlas’s In Good Health, summarized in this discussion.)

The crisis comes in the fact that the government pays for about one third of all U.S. healthcare spending ($847b in 2011, or 31% of total healthcare expenditures). That is, in 2011, 5.5% of our GDP was government expenditures on healthcare!

Growth in healthcare expenditures is not a crisis–it’s a change (and a positive change to the extent that the growth in any industry promotes our national economy). The crisis, rather, is the growth of government healthcare expenditures. This matter urgently demands our national attention–but should be considered separately from overall growth in expenditures.

About Mark Egge

Two truths and a lie: Mark Egge is an outdoor enthusiast, opera singer, and a transportation data scientist. He lives in Bozeman, Montana.
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