University of South Carolina, Arnold School of Public Health, Dept. of Health Services Policy and Management, HSPM J712,
Copyright © 2008 Samuel L. Baker

U.S. National Health Spending, 2006

The charts here show U.S. national health expenditure from 1960 to 2006. (2006 is the latest year for which we have official data. 2007's numbers are due out in December.)

The data are produced by the Centers for Medicare and Medicaid Services (CMS), part of the U.S. Department of Health and Human Services. CMS'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 spent about $718 billion in 2006, which was more than one-third of all U.S. health care spending.

CMS's web site, http://www.cms.hhs.gov/NationalHealthExpendData/, 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 measured by the right axis scale.

The same data shown with a logarithmic scale for the GDP and national health expenditure.

U.S. national health spending in 2006 was just over $2 trillion. This was just under 16% of the U.S. Gross Domestic Product, which was $13.2 trillion.

Divide the $2106 billion national health spending in 2006 by the estimated U.S. population in 2006, which is 300 million, and you get an average of $7018 spent on health care goods and services 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 produced 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 the early years of the Bush Administration, the percentage of health care in the GDP rose rapidly. It levelled off in 2004-2006. 2006's percentage -- 15.96% -- was just slightly higher than 2005's, which was slightly higher than 2004's.

When the percentage of national health spending in the GDP goes up, it means that the health sector was growing faster than the whole economy. Here is a graph showing the growth rates of national health spending and total economy spending.

annual growth, nhe and gdp, 1960-2006 The blue line shows by what percentage national health expenditures grew each year.

The purple line shows by what percentage gross domestic product grew each year.

Each point shows the percentage change from the preceding year to the year indicated.

When the blue line is above the purple line, the green line goes up. When the blue line is near the purple line, the green line is flat.  From 1993 to 2000, the economy grew just about as fast as national health spending, so the percentage of the GDP going to health spending did not change much.  During 2001-2003, the economy (purple line) grew more slowly than before. At the same time, national health spending (blue line) grew faster than before. The percentage of teh GDP going to health spending rose quickly.  In 2004 to 2006, national health spending and the economy grew at close the same rates. The green line levelled off again.

The chart makes it look like the economy grew faster during the 1970's than it did during the 1990's. Actually, though, economic growth was faster during the 1990's.  The problem with using these numbers to measure economic growth is that they are based on current dollar values.  The GDP measures the economy's size by the total value of what is produced here. Everything is valued at its price. If prices go up, the GDP can go up even if there is no increase in actual production.  The distinction I am making is between "nominal" and "real" GDP.  Real GDP is how much is produced with price changes taken out.

This next chart shows how the GDP has changed and how prices have changed.

growth of GDP and prices The upper line shows, for each year, the percentage change in the GDP ("nominal" GDP) from the year before. The lower line shows, for each year, the percentage change in prices from the year before. 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.

This graph goes to 2007, a year later than the other graphs. Those two low points of GDP growth inside the right end of the graph are 2001 and 2002.

The difference between the upper line and the lower line is what's called real GDP growth. It is the growth in actual production of goods in services. That difference is the lower line in the next graph.

For the last 15 years (through 2007), price inflation has been at about the same rate. Most of the ups and downs in the GDP have been changes in actual production.

For most of the 1970's, the red line is higher than for the years before or since. 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 fast 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, 1992-2000, and 2003-2005, the purple line is well below the red 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 The upper line shows, for each year, the percentage change in the National Health Expenditures from the year before, with rate of increase of prices in the economy subtracted out.
The lower line shows, for each year, the percentage change in GDP from the year before with rate of increase of prices in the economy subtracted out. You can think of this as the top line in the preceding graph minus the lower line in the preceding graph.

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. Even the fluctuations from 2001 to 2006 were milder than in the past. (I am afraid that 2008 will not look as good.)

The GDP growth line dipped below 0% in 1974-75, 1980, 1982, and 1991. The GDP shrank during those years. In between were some high-growth years, when the economy bounced back. 2001 had a negative-growth quarter, which caused the average growth rate during 2000-2001 to be just about 0%. There was an anemic recovery in 2002 and modest growth from 2003 to 2006.

National health spending, corrected for general inflation, grew rapidly from 1960 to 1992. Growth was slower in 1993 to 2000. During 2001 to 2003, growth was fast again. Growth slowed in 2004 and 2006.

Why the slower national health spending growth during those years? Managed care -- HMOs -- generally are given credit for the 1993-2000 slowdown. The deterioration of health insurance is the likely reason why growth has been slower lately.

Something to notice in the graph is that the GDP line has bigger jumps and dips than the 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.

Our analysis of prices and production needs another step. The red line in the graph represents growth in real production. As for the blue line, not all of that 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 blue line is above the red line, that is partly because people are getting more health care and partly because health care prices are rising faster than other prices.

This graph compares how medical care prices have behaved with how prices in general have behaved:

price inflation in health care and the whole economy

The upper line shows, for each year, the percentage change medical care prices, compared with the year before.

The lower line shows the percentage change in prices generally in the U.S. economy.

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.

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. There were some big differences during 1985 to 1992.

We can separate price change from real changes in medical care goods and services. This a rough estimate, because the medical care consumer price index is not strictly compatable with national health expenditure numbers. Here it is:

NHE growth rates adjusted for inflation

The top line shows how nominal national health spending changed each year.


The middle line shows how national health spending changed each year, if general price inflation in the economy is taken out.  This is an indicator of how fast resources flowed into the health care sector.

The lower line shows how national health spending changed each year, if medical care price inflation is taken out.  This is an indicator of growth in how many goods and services we got from our health care system.

When there is a big difference between the blue line and the pink line, as 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 2006, 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 like this: of the 7% that health care spending grew from 2005 to 2006, 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 government share of health care spending grew over this whole period 1960-2006, from 11% in 1960 to one-third in 2006. There was a jump in the Federal share after 1966, after Medicare and Medicaid started. After that, Federal spending's rose gradually after that, 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 during 2001 through 2005. The Federal share rose again in 2006 to a new all-time high. 2006 is when the Medicare prescription drug program started. Federal funding for prescription drugs was $26 billion more in 2006 than in 2005. Consumer spending for prescription drugs fell by $2 billion from 2005 to 2006.

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.  It was 14.2% in 1960 and 12.6% in 2006. 

Public spending was 46% of all health spending in 2006, according to the chart above. However, there is a big flow of Federal government spending that this chart hides. That is the tax subsidy for private health insurance and health spending. Our tax law allows businesses and individuals to deduct health insurance and some health care spending from their taxable incomes, and thus pay less income tax. In effect, the government pays back individuals and businesses who buy health care.  If you include that tax subsidy, the public share of health care spending is 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 gift shop and food sales.

Philanthropy, by the way, means money donations. The value of volunteer work is not included here. These numbers only measure money flows.

Uncompensated care is philanthropy by providers.  As such, it is not included in these numbers.  Money that providers get to help pay for uncompensated care, such as from indigent care funds or by charging extra for services, is included and attributed to those public or private sources.

Now, where the money was spent on:

US health care supplies and services 1960-2006 This shows the amounts spent, in billions of dollars, on each major category of health services and supplies.

Hospital care spending in 2006 was about $648 billion dollars, for example.

Hospital care is the biggest single category of health spending. Physician services is second. A distant third is prescription pharmaceuticals, which passed nursing home spending in 1999. Administration costs for private and public insurance is fourth-biggest, having passed nursing home care in 2003. Further down, some lines are so close together that one line shows and the other is hidden.  The end of the dark purple public health line is hiding behind Other Professional Care's line, for example. 

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.

US health care supplies and services 1960-2006 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.

The $0's on the Y-axis near the bottom of the graph should be $0.1 and $0.01.

Hospital care grew rapidly until about 1983, then its growth rate slowed.  Notice how hospital care's 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.  Then its growth rate sped up.   (Later in the course, we will see that this was partly because of a change to a more aggressive prescription drug 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 its growth rate slowed in the mid-1990s. The bumps and dips in home health spending show how much this industry 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.


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