University of South Carolina, Arnold School of Public Health, Dept. of Health Services Policy and Management, HSPM J712,
Copyright © 2007 Samuel L. Baker

U.S. national health spending, 2005

Here's a later version of this page!

The charts here show U.S. national health expenditure from 1960 to 2005. (2005 is the latest year for which we have official data. 2006's numbers will come out in January 2008.)

The data are produced by the Centers for Medicare and Medicaid Services (CMMS), part of the U.S. Department of Health and Human Services. CMMS's main responsibility is to manage Medicare, the Federal program for financing health care for the elderly and disabled, and the Federal portion of Medicaid, the Federal-State program for financing health care for some of the poor, as well as the related SCHIP program. Medicare and Medicaid (Federal and State) spent about $660 billion in 2005. Medicare and Medicaid were about one-third of all U.S. health care spending in 2005.

CMMS's web site,, has current and historical data on the U.S. health care system.

Now let's look at the charts ...
US health spending and GDP The green line shows the percentage of the gross national product going to national health expenditure. It is measured by the scale on the left axis.

The purple line, for gross domestic product (GDP), and the blue line, for national health expenditure (NHE), are in billions of dollars, measured by the right axis scale.

U.S. national health spending in 2005 was a hair under $2 trillion. This was 16% of the U.S. Gross Domestic Product, which was $12.4 trillion.

Divide the $1988 billion national health spending in 2005 by the estimated U.S. population in 2005, which is 297 million, and you get an average of $6693 spent on health care for every man, woman, and child in the country. Back in 1960, it was only $143 per person.

The Gross Domestic Product is the total market value of everything produced for sale in the U.S. You can think of it as the total amount spent by everybody on goods and services producted in the U.S. National health spending being 16% of that means that almost one-sixth of all the money spent for U.S.-made goods and services was spent on health care.

Back in 1960, health care was 5.1% of the GDP. The percentage rose during the 1960s, 1970s, 1980s, and the early 1990s. From 1993 to 2000, the percentage stopped rising. In each year of the Bush Administration through 2004, the percentage of health care in the GDP jumped to a new all-time high. 2005 set another new record, but not by much above 2004's percentage.

The growth rates here are the percentage changes from the preceding year to the year indicated.

annual growth, nhe and gdp, 1960-2005

At the right side of the graph, the green line indicates that health spending, as a percent of GDP, grew faster during 2001-2004 than it had during the mid- to late-1990's. It levelled off from 2004 to 2005. The green line rose quickly after 2000 because the GDP growth (purple line) was well below the national health expenditure growth (green line with triangles). For 2004 and 2005, the GDP growth line and the national health spending growth line were close to each other, so the green line above did not move much.

More towards the center of the graph, notice that up to 1993, national health expenditures (NHE) grew much faster than GDP during most years. This made the green line go up a lot during that period. From 1993 to 2000, national health expenditure grew at slower rate than in any year since 1960 (actually, since the 1940s!). Meantime, the GDP was growing well, so the green line levelled off.

The purple line in the chart above makes it look like the economy grew faster during the 1970's and 1980's than it did during the 1990's. That is deceptive. The problem is that the chart above is based on current dollar values. It ignores how the value of the dollar has changed. Remember that the GDP measures the economy's size by the total value of what is produced here. Everything is valued at its price. Prices can stretch. This next chart takes price changes into account.

growth of GDP and prices

The purple line shows how fast the GDP each year from the year before. The purple line is generally higher for the 1970s than for years before or since. GDP grew faster during the 1970s than it did before or since.

The red line shows the percentage change in prices in each year. In other words, it shows each year's rate of inflation. Price changes are measured by the GDP implicit price deflator, which is a price index that uses all of the items in the GDP as its market basket.

For the 1970's, the red line is higher than for the years before or since, just as the purple line is. This indicates that much of the high growth of GDP during the 1970s was because prices were rising, not because actual economic activity was rising.

To find years of big real growth, meaning growth in actual production rather than growth in prices, look for periods when there is a big difference between the purple and red lines. For the 1960s, 1992-1999, and 2004-2005, the red line is well below the purple line. There was real economic growth during those years.

During 1974, 1975, 1980, 1982, and 1991, the red line is above the purple line. This means that real production fell during those years. Those were "recession" years.

The data depicted above can be used to calculate this chart:

GDP and NHE growth rates adjusted for inflation
This chart takes the effect of general price inflation out of the growth rates in national health expenditure and GDP. Now we see that real GDP growth from 1992 to 2000 was steadier than it had been for decades. In 1974-75, 1980, 1982, and 1991 GDP growth was negative. Those were recession years. In between were some high-growth years, when the economy bounced back. 2001 also had a recession, which caused the average growth rate during 2000-2001 to be just about 0%. There was an anemic recovery in 2002 and a better recovery from 2003 to 2005. National health spending, corrected for general inflation, grew slower in 2003 that in 2001 or 2002. It grew even slower in 2004 and 2005, almost back down to the growth rate of the late 1990's.

Not all of that NHE general-inflation-corrected growth (green line with triangles) represents growth in real resources going into health care. Health care has its own rate of price inflation that is higher than the general rate of inflation. When the green line is above the purple line, that is partly because people are getting more health care and partly because health care prices are rising faster than other prices.

Another thing to notice in the above graph is that the purple GDP line has bigger jumps and dips than the green NHE line. GDP growth fluctuates over a wider range than does national health spending. Health care is less "cyclical," in economics jargon, meaning that it is more stable, less subject to boom and bust swings than many other industries. Construction is an example of an industry that is highly cyclical. This means that, generally speaking, it's easier to earn a steady income in health care than in construction.

Let's look at prices some more. The graph below shows the changes from year to year in medical care prices, compared with all prices. The medical care price index comes from the U.S. Bureau of Labor Statistics. It is part of the consumer price index, based on the spending patterns of urban workers' families. It is not quite right to compare this with the price index for the whole economy that the U.S. Bureau of Economic Analysis calculates. That's because there are lots of things in the whole economy and in health care spending that urban consumers do not buy. For example, health care spending includes public health, and it includes construction and maintenance of buildings where medical care is delivered. Individual consumers do not buy those things. Take this comparison as a rough guide only.

health care and general inflation

In every year, except for the oil price shock of 1973-1974, medical care prices went up faster than prices in the economy as a whole. The greatest difference was during 1985 to 1992, roughly.

Putting aside my warning about the medical care consumer price index not being strictly compatable with the total health care spending number, we can calculate this:

NHE growth rates adjusted for inflation

When there is a big difference between the blue line and the pink line, like during 1975-1981, most of the growth in health care spending is due to rising prices for medical care, not more actual service. When the blue and pink lines are close, as during the early 1960s, most of the growth in health care spending is due to more service being provided. For 2005, the blue line is at about 7%, the green line is at about 4%, and the pink line is at about 3%. You can interpret that by saying that, of the 7% that health care spending grew from 2005 to 2005, three percentage points was more actual services and goods, three percentage points was general price inflation, and one percentage point was health care price inflation in excess of general inflation.

Now let's look at who spent all this health care money. In broad categories.

This chart shows how much of health care spending was private and how much was by government. Federal spending is mostly Medicare and Medicaid. Private spending is mostly out-of-pocket payments and private insurance.

The Federal share grew over this period. It was 11% of health spending in 1960. The jump in the Federal share after 1966 was because Medicare and Medicaid started then. After that, Federal spending's rose gradually, peaking at just over 30% in 1998. The Federal share fell a bit from 1998 to 2000, partly because of Medicare cuts, and partly because private spending grew as the economy grew briskly. Some liberalization of Medicare in 2001, and a slowing of private spending due to the poor economy, sent the Federal share back up a bit during 2001 through 2005. 2005 is before the Medicare prescription drug program started, so we can't see the effect of that yet.

State and local spending (the middle band) includes the state portion of Medicaid, as well as state and local public health activities. State and local spending's share is about the same now as in 1960.

Private spending totals about 60% of all health spending, according to the chart above. However, there is a big flow of Federal spending that this chart hides. That is the tax subsidy for private health insurance and health spending. The subsidy takes the form of businesses and individuals deducting health insurance and health care spending from their taxable incomes. If you include in the public category the money that the government pays individuals and businesses to help them buy health care, the public percentrage goes up to over 60%.

This graph separates the private share into out-of-pocket payment, payments by private insurance, and other. I reversed the vertical order of the sections, so you can better see how the private share divides. Over the decades, a smaller and smaller share of health spending has been out-of-pocket.

Out-of-pocket spending's share declined from nearly half of health spending in 1960 to about one dollar in eight in 2005. Deductibles and copayments are getting higher, but they haven't kept up with the growth of the health care sector.

Insurance spending has grown steadily over the decades. The diagram calls this Premiums, because the administrative expense and profit of the insurance industry is counted as health care spending.

The Federal share jumped in the 1960s when Medicare and Medicaid started. The Federal share has continued to grow. This is partly due to the aging of the population. More Americans are old enough for Medicare than ever before.

I mentioned that this breakdown understates the public role in health care finance share by not counting the tax subsidy for private health spending. Another part of public spending also appears in this chart as "private." This is government employee health insurance through private insurance plans. When a government employee elects, say, the Kaiser health insurance plan, that counts here as private spending. So, overall, these figures make private spending on health care look bigger than it really is, and they make public spending look smaller.

Some politicians like to claim that philanthropy can replace government health care programs. You should know that philanthropy is less than half of that sliver in the middle of the chart labelled Other Private. Most of the Other Private money -- more than philanthropy -- is what hospitals make from parking fees and food sales. (Note: Philanthropy means money donations. The value of uncompensated care is not included here, nor is the value of volunteer work. These graphs only measure money flows.)

Now, where the money went:

US health care spending 1960-2005

This shows the amounts spent on each major category, in billions of dollars. Hospital care spending in 2005 was about $612 billion dollars, for example.

Hospital care is the biggest single category of health spending. Physician services is second. A distant third is pharmaceuticals, which passed nursing home spending in 1999. Porgram and insurance administration passed nursing home care to take fourth place in 2003. Further down, dental care spending and construction spending have been about the same recently, so the dental line seems to be hiding under the construction line.

The research portion of national health expenditure includes funded research such as is done at our School. Research done by pharmacetical companies is paid for by their sales of drugs, so it is included in the pharmaceutical spending category.

This shows the same data with a logarithmic Y axis. Straight lines on a logarithmic graph are constant growth rates. That is the purpose of a logarithmic graph, to let you see growth rates. Hospital care's growth rate slowed after about 1983 -- notice how its line is less steeply sloped after 1983. Physician services's growth rate slowed a bit after 1990. Pharmaceuticals grew more slowly than most other components from 1960 to 1980, but pharmaceutical spending has grown faster since. (Later in the course, we will see that this was partly because of a change to a more aggressive pricing policy.) Nursing home growth, which had been rapid in the 1960s and 1970s, slowed some in the 1990s. Home health grew fast from a small start, but levelled off in the mid-1990s. The bumps and dips in home health spending show how much this industry in particular has been affected by government policy changes.

This graph shows relative shares of the health health services and supplies dollar. That is everything in the preceding graphs except research and construction.

I put public health at the top of the graph. Its share, though small, did has been rising over the past decade or so.

Administrative cost's share has been rising lately.

Nursing home care grew rapidly in earlier years, but recently other sectors have grown faster. Home health care's has grown.

Prescription drugs got left behind a bit in the 1960's and 1970's, but have since come back.

Physicians generally maintained their share. They even increased their share a bit in 2004 and 2005. Hospitals' share rose from 1960 to 1983. Since 1983, hospitals' share has fallen. This does not mean hospitals are taking in less money (as you can see from the preceding graphs). It just means that other parts of health care have grown faster. In 2005, the hospitals' share grew a little.

That is your general overview of U.S. healthcare spending. The biggest in the world! But is it the best? That's another discussion topic.
The views and opinions expressed in this page are strictly those of the page author. The contents of this page have not been reviewed or approved by the University of South Carolina.