Health Expenditure Trends

Key Questions

How Much Does the Government Owe?

In the aggregate, debts and unfunded liabilities across all levels of government amount to $279 trillion. Debt represents money already spent and owed, whereas unfunded liabilities represent the difference between promised spending and projected revenues based on current policy, i.e., assuming no changes in commitments or taxes. Note that current debts are not included in estimates of unfunded liabilities since the latter occur in the future.

These are net present value figures measured in 2012 dollars, meaning that they are inflation-adjusted and discounted to reflect the time value of money. The discount rate used for such purposes is generally the long-term U.S. Treasury bill rate (usually 3%) since that is viewed as the rate of return on a “safe” investment; thus, it is the rate that U.S. citizens require to be paid to give up a dollar today to get a dollar in the future. Thus, a dollar today is worth $1 whereas $1 (of revenues or spending) is worth only $1/1.03. Another way of viewing the $260 trillion then, is that it is the amount the U.S. Treasury would need in the bank today–earning interest at 3%–to generate the stream of payments over future generations needed to finance all the promises of government above and beyond the realistically-projected government revenues that are expected during the same period. Put another way, it is the lump-sum annuity payment required to cover in perpetuity all additional government promises that cannot be paid under the current tax structure.

Government Debt. The federal debt ($16.2 trillion) and state and local government debt ($2.8 trillion) are reported continuously at the U.S. Debt Clock. Technically, the federal debt includes a public component (e.g., what is owed to other nations and individual U.S. citizens who have purchased Treasury bonds) and an internal component, i.e., what the U.S. Treasury owes the Social Security and Medicare trust funds in principal and interest payments in light of the many decades of borrowing payroll taxes paid into those trust funds to instead pay for other activities of government. Given that the U.S. government is most unlikely to renege on its obligations to seniors, many analysts view the distinction as meaningless. At some point, all those debts will have to be repaid in some fashion which means that the taxes or borrowing used to do so cannot be spent on other government purposes.

Federal Fiscal Gap. Laurence Kotlikoff estimates that in 2011, the federal fiscal gap was $211 trillion, calculated as the net present value of all projected federal revenues and expenditures under current policy. These were based on the Congressional Budget Office’s alternative fiscal scenario for the next 75 years. The alternative fiscal scenario (AFS) essentially reflects current policy as opposed to current law. For example, current law requires physician fees under Medicare to be cut drastically, but every year for more than a decade, Congress has enacted a temporary “doc fix” that averted these steep fee reductions. Since these fixes are only temporary, the CBO in making its 75 year projections would have to assume  that a steep cut in fees was adopted as soon as the current fix expires–since that’s what “current law” requires. But this would result in a very unrealistic projection of Medicare spending: such drastic fee cuts would have such adverse consequences for the ability of Medicare recipients to find physicians willing to serve them that it is quite unlikely Congress ever will permit such cuts to take effect.  The AFS, in contrast, assumes Congress will continue doing what it has always done for this and other elements of policy. The alternative minimum tax is another illustration of where the law technically requires this to apply to many millions more taxpayers, but every year Congress enacts a  temporary reprieve, resulting in lower revenues than would otherwise be the case.  For spending beyond the 75 year window included in CBO’s annual projections of long-term federal revenues and spending, Kotlikoff assumed that annual non-interest spending, as well as taxes, would grow indefinitely by 2 percent a year beyond the point at which the CBO’s estimates end. Kotlikoff used the same method to calculate that by 2012, the federal fiscal gap had grown to $222 trillion–an increase of $11 trillion in just one year.  At least $122 trillion of this amount is related to health entitlements, Medicare, Medicaid and new subsidies to be provided through health exchanges under the Affordable Care Act.

State and Local Government Fiscal Gap. The equivalently-calculated figure of unfunded liabilities for state and local governments is $38 trillion.

What Would it Take to Close the Fiscal Gap?

Kotlikoff estimates that in 2012, closing the federal fiscal gap ($222T) using taxes would require an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the U.S. could cut, immediately and permanently, all federal purchases and transfer payments, including Social Security and Medicare benefits, by 40 percent. Thus, to address the entire $279T owed by governments at all levels would require these estimates to be one-quarter higher.

Are Current Health Spending Trends Affordable?

The Congressional Budget Office shows spending growth has exceeded real GDP growth. If these trends continue in the future, can the US afford to sustain their current spending habits? According to Micheal E. Chernew, our current trends are affordable only if excess health spending growth is limited to a 1% increase each year. He also illustrates how reform could keep things more affordable in the future. His insight has implications for many employers nation-wide whose employees are jeopardized by the rising health care costs.

A report prepared for the U.S. Department of Health and Human Services systematically examines The Effect of Health Care Cost Growth on the U.S. Economy. The report presents various perspectives on how growth in health care spending affects the US economy. The report

  •  summarizes a review of the literature, focusing on the mechanisms through which health care spending could affect the U.S. economy, including aggregate economic outcomes, employers, the government, households, and local economies. As well,

available state-level data are used to analyze the effects of health care cost growth on aggregate economic indictors, industries, and state governments.

What are the Key Drivers of US Health Spending?

In her issue brief, Cara S. Lesser addresses many problems of growing health care costs. Advances in technology and quality improvements in the health field are two key drivers of rising health costs. Paul B. Ginsburg notes that new medical technology has been the dominant driver of increases in health care costs and insurance premiums, and he discusses this implication in politics. The cost-effectiveness of new technologies raises a great debate. Furthermore, a peer group report of health care quality and cost indicated that more knowledgeable consumers today are demanding better quality of care, which in turn raises prices.

How Does the US Compare to the Rest of the World in Terms of Health Care Spending?

The Commonwealth Fund examined health care spending in the US and other OCED nations and found that U.S. health spending per capita significantly and consistently outpaces that of other industrialized nations. National health spending as a percentage of GDP is the highest in the US, thus health spending places more of a burden on the economy, says Uwe E. Reinhardt. This can partly be attributed to the fact that the US health system relies more heavily on specialty care than other developed nations. According to Leiyu Shi, the 70% of physicians in the United States are specialists, compared with 25-50% in other industrialized nations.


Historical Trends

  • Congressional Budget Office, Growth in Health Care Costs, CBO Testimony before the Committee on the Budget
    United States Senate, January 31, 2008.
  • Paul B. Ginsburg, High and Rising Health Care Costs: Demystifying U.S. Health Care Spending, Robert Wood
    Johnson Foundation. The Synthesis Project, October 2008.
  • Institute for the Future. What could health and health care in the US look like in 2020?
    This group postulates what health care could be like under 4 alternative scenarios: a) a growth scenario that manifests the results of current trends and conditions, extrapolated forward. This includes both positive and negative growth; b) a discipline scenario in which a core guiding value or purpose is used to organize society and control behavior (e.g., population control)
    ; c) a collapse scenario in which major social systems are strained beyond the breaking point, causing system collapse and social disarray; and d) a transformation scenario in which a fundamental reorganization of a society or system signals a break from previous systems (e.g., greater-than-human machine intelligence).
  • Hospital, Employment and Price Indicators
    Includes a) community hospital statistics; b) Medicare trust fund data; c) health sector employment, earnings and hours; d) medical prices; and e) HCFA projected price indices for hospital, nursing home, and home health.
  • Consumer Price Index (Bureau of Labor Statistics)
    BLS tracks prices for a) Medical care, which is a composite of 1) Medical care commodities and 2) Medical care services.
    Medical care commodities includes a) Medicinal drugs, which is a composite of 1) Prescription drugs; and 2) Nonprescription drugs; and b) Medical equipment and supplies.
    Medical care services is a composite of a) Professional services, which includes 1) Physicians’ services, 2) Dental services, 3) Eyeglasses and eye care, and 4) Services by other medical professionals; b) Hospital and related services, which includes 1) Hospital services [which includes Inpatient hospital services and Outpatient hospital services], 2) Nursing homes and adult day services, and 3) Care of invalids and elderly at home; and c) Health insurance.
  • Producer Price Index (Bureau of Labor Statistics)
    BLS tracks prices for a) Offices of physicians, b) Offices of dentists, c) Medical and diagnostic laboratories, d) Home health care services, e) Blood and organ banks, f) Hospitals, g) Nursing care facilities, and h) Residential mental retardation facilities.
  • Health Cost Index Report (Milliman)
    The Health Cost Index Report™ (HCIR) is a quarterly newsletter that presents the latest trends and forecasts from Milliman’s proprietary database of medical trends. These trends measure the market average rate of increase in medical costs for a typical $250 deductible Comprehensive Major Medical benefit package. The database measures the growth rate in medical consumption by measuring how fast provider net revenues increase. This inherently captures price, utilization and mix/intensity of service changes (technology). The HCIR presents trends by benefit and by region of the country. The quarterly reports also contain one year forecasts and Milliman’s latest research on medical trends.
  • Milliman Medical IndexThe annual Milliman Medical Index (MMI) measures the total cost of healthcare for a typical family of four covered by a preferred provider plan (PPO). The 2012 MMI cost is $20,728, an increase of $1,335, or 6.9% over 2011. Even though the rate of increase is slowing from prior years, it has taken fewer than nine years for such costs to more than double. In 2002, the cost of healthcare for the typical family of four was $9,235.


  • Aaron, Henry. “There Is No Entitlement Problem,” Brookings Institution, February 23, 2009. “That the United States faces daunting long-term budget challenges is indisputable. But the very projections—those of the Congressional Budget Office—cited to document the long-term budget challenge, show that there is no general entitlement problem. Rather, the nation faces a daunting health care financing problem that bedevils private insurers and public programs alike.”
  • Blahous, Charles.  CBO Explodes the Health Care Myth, Hudson Institute, June 30,2009, argues that 2007 CBO long term health projections report substantially understated the contribution of population aging on health spending trends.
  • Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services. NHE Historical and projections, 1965-2020 (ZIP, 22 KB).
  • Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services. Projections of National Health Expenditures: Methodology and Model Specification. July 28, 2011.
  • Congressional Budget Office, The Long-Term Outlook for Health Care Spending, November, 2007.
  • Congressional Budget OfficeLong-Term Budget Outlook, June 2010. This report concludes that through 2035, population aging would account for fully 64 percent of the cost growth in the major federal mandatory health programs and Social Security, with excess health cost inflation being a relatively smaller factor.
  • The U.S. Healthcare System: Can This Patient Be Saved?” The Global Human Capital Journal, February 24, 2008. Provides assessments of U.S. health system from key experts, including Ian Morrison, Ph.D., healthcare futurist, Dean Harrison, CEO Northwestern Memorial Healthcare; William Novelli, CEO AARP; and Scott P. Serota, CEO BlueCross BlueShield Association.

2 Responses to “Health Expenditure Trends”

  1. Margaret Schmelzer Says:

    In 2002, McGinnis et al., stated that only 5% of US health expenditures are directed toward health promotion. My question is, has this percent changed and if so what is the current estimate.

    Thank you
    Margaret Schmelzer, MS, RN
    State Health Plan Director
    Director of Public Health Nursing and Health Policy
    Wisconsin Department of Health Services
    Madison, WI

    • Chris Conover Says:

      Sorry for a delayed reply. The CMS figure cited by McGinnis is updated annually. Both historical and projected. CMS does not track “health promotion” spending per se. The closest aggregate is “government public health spending” which excludes many health-promotion-related expenditures made by health insurers, employers, and non-profit organizations. In 2010, public health spending was $80.8B of $2,569.8B in total national health expenditures, i.e., 3.1% of the total. If divided just by personal health spending (i.e., excluding spending on research, construction, insurance administration), the share would rise to 3.7%.

      In 2002, the analogous figures are $52.4B out of 1,602.4B in total NHE (3.3%) or $1340.3 in PHCE (3.9%). Thus, I’m not sure where the 5% figure came from, but the trend suggests a slightly declining share of health spending regardless of how it is measured. Hope this helps.

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