University of South Carolina, Arnold School of Public Health, Dept. of Health Services Policy and Management, HSPM J712,
Copyright © 2010 Samuel L. Baker

U.S. National Health Spending, 2008

The charts here show U.S. national health expenditure from 1960 to 2008. (2008 is the latest year for which we have official data. 2009'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 $831 billion in 2008, 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.

U.S. national health spending in 2008 was over $2.3 trillion (blue dot on the right axis). This was 16.2% (use the left axis to interpret the green line) of the U.S. Gross Domestic Product (GDP), which was $14.4 trillion (red dot high on the right axis). In 2008, almost one dollar in six that was spent on anything in the U.S. (that is what the GDP is), was spent on our health care system.

Divide the $2339 billion national health spending in 2008 by the U.S. population in 2008 -- about 305 million -- and you get an average of $7668 per person spent on producing health care. Back in 1960, it was only $143 per person.

Both the GDP and national health spending have risen a lot over the last 48 years. National health spending has grown faster than the whole economy, which is why the green line shows a steep rise.

The green line in the chart shows that, back in 1960, health care was 5.1% of the GDP. The percentage rose from the 1960s into the early 1990s. During that period, the growth paused only briefly a couple of times. From 1993 to 2000, the percentage of national health spending in the gross domestic product held steady. In the early years of the Bush Administration, the percentage of health care in the GDP rose rapidly, but then it almost levelled off. The percentage made a little jump in 2008, mainly because the financial crisis slowed the growth of GDP, but did not slow health care spending as much. More on that later.

Here is a graph showing the growth rates of national health spending and total economy spending (GDP).

annual growth, nhe and gdp

The blue triangles show by what percentage national health expenditures grew each year from the year before.

The purple diamonds show by what percentage gross domestic product grew each year from the year before.

The green line is the percentage of the GDP going to the health care system, just as in the first diagram.

When the blue triangle is above the purple diamond, the green line goes up. When the blue triangle is near the purple diamond, the green line is level.

For most of the years before 1993, the blue triangle for national health spending is well above the purple diamond for GDP. That shows that, for several decades, health care grew faster than the economy as a whole. For 1993 to 2000, the blue and purple are pretty close to each other. In those years, the economy grew just about as fast as national health spending, so the percentage of the GDP going to health spending did not rise 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. From 2003 to 2007, national health spending and the economy grew at close the same rates. The green line almost levelled off again. Then, in 2008, the economy's growth rate plunged, indicated by the purple diamond at the right edge of the graph. Health care spending's growth rate also fell, but not by as much.

Growth rate diagrams can be confusing. The growth rate of GDP in 2008 was just over 2%. That is positive growth, but at a slower rate than in 2007. If the economy had shrunk, the growth rate would have been below 0%.

The chart makes it look like the economy grew faster during the 1970's than it did during the 1990's. Actually, economic growth was faster during the 1990's than during the 1970's. To straighten that out, we need to talk about prices and inflation.

A problem with using the GDP to measure economic growth is that the GDP is based on current dollar values for goods and services. In other words, 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.

The same distinction applies to health care, too. Some of the growth in health care spending is because people got more services, but some is just because prices for the services went up. If a pill you buy regularly cost $30 last year and costs $33 today, you are spending 10% more but you are not getting more pills.

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

growth of GDP and prices

The purple 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. You can think of the implicit price deflator as showing how much prices for everying increased. (Every year there are new products, of course. Apple introduced a new iPhone model in 2008, and Kraft introduced Bagel-fuls. Economists at the U.S. Commerce Department do their best to bring new products into the price index in a fair way.)

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.

On this graph, where the purple line is well above the red line, there was a lot of real growth during that year. When the two lines are close, all of the growth is in prices, not in real stuff. Real production shrank during the years for which the red square is above the purple diamond.

During the 1970's, prices rose fast in most of those years. You can see how high the red line was during the 1970's. The GDP line is not much higher. Much of that high growth of GDP during the 1970s was because prices were rising, not because actual economic activity was rising.

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.

Now let us bring in health care system spending. As a first step, we take general price inflation out of the GDP and health care spending numbers.

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. This is 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. In the left half of the graph, you can see how the real GDP growth rate jumped up and down a lot. Real growth was steadier from 1992 to 2000, the Clinton years. There were more fluctuations from 2001 to 2006, but they were not as sharp as in the 1970's and 1980's.

The economy's growth rate took a dive in 2008. Growth from 2007 to 2008 in real terms was just barely positive. And then it got worse. I put a point on the graph for real GDP growth from mid-2008 to mid-2009. It was at -3.8%, the lowest point on the graph by far.

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 during 2004-2007, and slowed more in 2008.

Why the slower national health spending growth during some years? Managed care -- HMOs -- generally are given credit for the 1993-2000 slowdown. The likely reason why growth has been slower lately is people have been losing their jobs with that their health insurance. Medicaid has expanded, but not by enough to make up, especially because Medicaid pays lower prices than private insurance.

Something to notice in the graph is that the NHE line has smaller jumps and dips than the NHE line. 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. Generally speaking, it is easier to earn a steady income in health care than in construction.

Our next step is to adjust the health care spending numbers for health care prices. The blue line in the graph above does not yet represent 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. In the above graph, where the blue line is above the red line, that is partly because people were getting more health care and partly because health care prices were 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. Medical care prices rose much faster than general prices during 1985 to 1992. In 2008, general inflation slowed. Medical care price increases also slowed, but not by as much.

Now we separate price changes 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 pink lower line is the one to pay attention to. It estimates the real growth rate in the health care sector. All price inflation is taken out.

In percentage terms, health care grew faster before about 1983 than since. 2008's growth rate in the health care sector was one of the lowest.

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 2008, the blue line is at about 4%, the green line is at about 2%, and the pink line is just under 1%. You can interpret that like this: Of the 4% that health care spending grew from 2007 to 2008, one percentage point was more actual services and goods, two percentage points were general price inflation, and one percentage point was health care price inflation in excess of general inflation.

The health care CPI fell in July 2010.

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

Federal, State, and private shares

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, from 10% in 1960 to 35% in 2008. 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. Private spending for prescription drugs fell by $2 billion from 2005 to 2006. In 2008, the Federal share jumped up two percentage points, as the private economy slumped.

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 a little lower now than it was in 1960. It was 14.2% in 1960 and 12.4% in 2008. Back in the 1960's, South Carolina paid for Department of Health and Environmental Control services with state dollars. Much of that is now paid for my Medicaid, which is about three-fourths Federal money. The states' share of health care spending was lower in 2008 than in 2007. States have to cut back spending when tax revenues fall during a recession.

Public spending was 47% of all health spending in 2008, 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 about 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 less than one dollar in eight in 2008. Deductibles and copayments are getting higher, which means more out-of-pocket spending, but public spending has growing faster. Insurance premiums as a proportion of health care spending fell slightly in 2006, 2007, and 2008.

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. Mostly, though, it is due to expanded coverage by Federal programs.

I mentioned above that this breakdown understates the public role in health care finance share by not counting the tax subsidy for private health spending. There is another part of public spending that 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, as such, is not included in these numbers. That is also because these numbers use money flows to measure the size of the health care sector. Money that providers get to help pay for uncompensated care, such as from indigent care funds or by charging above cost for some services, is included. Indigent care funds are in public spending. Charges above cost to individuals and insurance are in private spending.

Now, what the money was spent on:

Where health care spending went 1960-2008 This shows the amounts spent, in billions of dollars, on each major category of health services and supplies.

Hospital care spending in 2008 was about $718 billion dollars, for example.

Hospital care is the biggest single category of health spending. Physician services is second. A distant third is prescription pharmaceuticals, followed by administration costs for health insurance in fourth place. All four of those started growing faster in the late 1990's. Nursing home care, which used to be third biggest, is now fifth biggest. Further down, the lines are too close together to separate. The end of the dark purple public health line is hiding behind Other Professional Care's line, for example. 

The research line on the graph includes research such as is done at our School and other such institutions. Research done by pharmacetical companies is paid for by their sales of drugs, so it is included in the pharmaceutical spending category. Similarly, hospitals' and doctors' offices' administrative costs are in the hospitals and physicians lines respectively.

US health care supplies and services by function 1960-2008 logarithms This shows the same data with a logarithmic Y axis. Straight lines on a logarithmic graph are constant growth rates. Steeper slopes mean higher growth rates. This graph also helps you see what is going on in the earlier years with some of the smaller components of the health care system.

Notice how hospital care's line is less steeply sloped after 1983 than before. That says that hospital care grew rapidly until about 1983, then its growth rate slowed. Hospital care spending continued to grow after 1983, but less quickly than before. Physician services's growth rate similarly slowed, but later, around 1990. For the past ten years, spending on hospitals and doctors has grown a little faster. Pharmaceuticals grew more slowly than most other components from 1960 to 1980. Then their 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.) Since 2003, pharmaceuticals' growth has been a little slower, but still faster than most other major components of health care spending. Nursing home growth was rapid in the 1960s and 1970s. After that growth slowed. 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 was affected by government policy changes.

This graph shows, for the years 1960-2008, 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. That lets you see how public health's small share rose from 1960 to 2000, then levelled off pretty much.

Administrative cost's share rose from 2000 to 2007, but fell in 2008.

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 more than come back.

Physicians generally maintained their share.

Hospitals' share rose from 1960 to 1983. From 1983 to 2001, hospitals' share fell. This does not mean hospitals were get less money. The preceding graph shows that hospital care was growing. It just means that other parts of health care have grew faster. Since 2001, the hospitals' share has been steady.

That is your general overview of U.S. healthcare spending. The most in the world! But do we get good value for all spending? That's what a lot of this course is about!


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