Is Healthcare Spending Leveling Out at Last?

Is Healthcare Spending Leveling Out at Last?

Is Healthcare Spending Leveling Out at Last?

Is the rise in US health care spending slowing down?

For perspective, health care spending as a share of GDP had been rising steadily over the half-century prior to 2010: 5% of GDP in 1960, 6.9% of GDP in 1970, 8.9% of GDP in 1980, 12.1% of GDP in 1990, 13.3% of GDP in 2000, and 17.2% of GDP in 2010, and US health care spending reached a peak of 19.5% of GDP in 2020.

However, 2020 was the first year of the pandemic. The most recent figures on US health care spending show that it was 17.3% of GDP in 2022, similar to the average of the pre-pandemic years from 2016-2019.

Understanding health care spending matters. After all, back in 1960 health care spending was one-twentieth of the US economy; now, it’s closer to one-fifth. For workers whose employers pay for their health insurance, it has been common over the years to see pay “raises” in the form of more costly health insurance coverage, rather than equivalently higher take-home pay. For government, the soaring costs of health care programs like Medicaid and Medicare are a substantial part of what is driving higher long-run budget deficits.

For an overview of the just-released data on US health care spending in 2022, the baseline starting point is “National Health Care Spending In 2022: Growth Similar To Prepandemic Rates,” by Micah Hartman, Anne B. Martin, Lekha Whittle, Aaron Catlin, and The National Health Expenditure Accounts Team (Health Affairs, published online December 13, 2023, forthcoming in January 2024 issue).

The authors point out that in 2022, unlike in so many earlier years, inflation in other goods and services was faster than inflation in health care, which explains the lower ratio of health care spending to GDP in 2022.

In 2022, nominal GDP growth was largely driven by rapid economywide inflation (unlike in 2021), as the GDP price index increased 7.1 percent (the fastest rate since 1981), after growth of 4.6 percent in 2021. Medical price inflation, in contrast, increased only 3.2 percent in 2022 after even slower growth of 1.5 percent in 2021. Inflation in the medical sector might not follow the patterns of the overall economy, as prices for some goods and services that are predominantly paid for by insurance (such as Medicare, Medicaid, and private health insurance) tend to be set in advance through legislation, regulation, or contractual agreements.

They also point out that the share of Americans with some form of health insurance reached an all-time high in 2022: “The insured share of the population reached a historic high of 92.0 percent in 2022 as enrollment in private health insurance increased at a faster rate relative to 2021 and Medicaid enrollment continued to experience strong growth.”

Will US health care spending as a share of GDP tend to remain where it is in 2022, or perhaps even decline a bit? In late October, the Economist magazine pointed out that the rise in health care spending seemed to be slowing down, not just in the US, but in high-income countries across the world. The article put forward various hypotheses: supply-side technology changes and government pressures for lower prices. For example:

The nature of technological innovation in health care may now be changing. One possibility is that there has been a generalised slowdown in treatments that represent medical breakthroughs and are costly, such as dialysis. But this is difficult to square with a fairly healthy pipeline of drugs coming to market. Another possibility, which is perhaps more plausible, is that the type of advancements has changed, involving a shift from whizzy curative treatments to less glamorous preventive ones. There is decent evidence that the increased use of aspirin, a very low-cost preventative treatment, in the 1990s has cut American spending on the treatment of cardiovascular diseases today. …

Demand-side factors may also be keeping health-care spending in check. In America the Affordable Care Act (ACA)—which was introduced in 2010, at about the time costs tailed off—tightened up the ways in which the government reimburses companies that provide treatment. The aca also made it more difficult for doctors to prescribe unnecessary treatments (seven expensive scans, perhaps, instead of one cheap one) in order to make more money.

On the other side, the semi-official government predictions suggest that the rise in health care spending as a share of GDP is still proceeding. In a Health Affairs article back in June 2023, a team of government health care economists provided “National Health Expenditure Projections, 2022–31: Growth To Stabilize Once The COVID-19 Public Health Emergency Ends,” by Sean P. Keehan, Jacqueline A. Fiore, John A. Poisal, Gigi A. Cuckler, Andrea M. Sisko, Sheila D. Smith, Andrew J. Madison, and Kathryn E. Rennie.

These authors had health care spending data through 2021, and they forecasted the final spending levels of 2022 spending quite accurately. However, their projection is for US health care spending as a share of GDP to rise gradually through the rest of the 2020s, reaching 19.6% of GDP by the end of their projection window in 2031. One of the big drivers of the shift is the rise in the number of elderly and very elderly Americans. This forecast suggests that although the rise in US healthcare spending as a share of GDP paused in the 2010s, but will return in the 2020s.

But although the demographic patterns of an aging America are pretty much set in stone for the next couple of decades, the patterns of health care spending can be altered. As one example, I’ve argued in the past that although finding ways to support people in managing their chronic conditions (like high blood pressure and diabetes) has traditionally been outside what is regarded as “health care spending,” it could have large payoffs in terms of improved health and reduced need for expensive episodes of hospitalization (for discussion, see herehere, and here).

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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