U.S. Health Care Spending: Unlocking the Keys to the Excess

Lola Butcher
Contributing Editor

America’s health care spending shares some unfortunate attributes with the country’s obesity epidemic: It’s a growing problem, easy to see, and harder to fix than you might think.

In 2017, U.S. health expenditures weighed in at $3.49 trillion, or $10,739 per capita. That works out to 17.9% of gross domestic product, about the same as the previous year, and about the same proportion, according to CMS projections, that we can expect when the official figures are published for 2018 and 2019.

Americans spent $3.49 trillion on health care in 2017.

But don’t get the idea that the American health care spending bulge is under control. The Great Recession and perhaps some provisions of the ACA tempered the persistent increase during the past decade. In the decade ahead, CMS projects national health spending will grow, on average, by 5.5% a year. By 2027, it projects per-capita spending of nearly $16,907, which would translate into health care accounting for 19.4% of GDP.

Irene Papanicolas

Even at the current rate, the situation is not good, says Irene Papanicolas, a health economist at the London School for Economics and Political Science. In a much-talked about paper published in Health Affairs, she and her co-authors compared U.S. health care spending in 2016 with spending in 10 of the world’s highest-income countries. The American spend of 17.8% of GDP was far higher than the other countries and well above the average of 11.5%. 

“We’re not talking about a small amount more—it’s considerably more than everyone else,” says Papanicolas.

On a per-capita basis, the U.S. spent about $9,400 on health care in 2016 compared with an average of $5,400, but, of course, the mean gets dragged up by American spending. The Swiss were the next highest spenders at $6,800. 

Almost everywhere you look American excess is evident. Papanicolas and her colleagues showed that administrative costs of care accounted for 8% of U.S. health care spending compared with just 1% to 3% in the other countries. Pharmaceutical spending per capita was $1,443 in U.S. versus a range of $466 to $939 in the comparison nations. And on it continues.

Gerard Anderson

Gerard Anderson, a health economist at the Johns Hopkins School of Public Health, has been watching the nation’s health care spending balloon since the ’70s when it was less than 10% of GDP. Still, he says, “something is going to have to change because we cannot continue on this trajectory.” If health care spending builds to account for 25% to 30% of GDP, Anderson says, all the growth in the economy will be devoted to health. “That’s the tipping point,” he says. “We could still spend more on health care, but we would be spending less on education or on housing or on other things.”

David Cutler, a health economist at Harvard University, doesn’t fret about health care’s large—and getting larger—slice of the GDP pie: “The overall share of the gross domestic product spent on medical care is not a problem,” he wrote in Health Affairs last year. After all, he points out, agriculture accounted for a third of U.S. GDP in 1900, and manufacturing accounted for a quarter in 1950; today, the two industries combined account for only 13%. The makeup of the American economy has changed. But the way those health care dollars are spent worries Cutler a great deal.

His first concern is wasteful spending—hospitalizations for people whose congestive heart failure is not properly controlled; back surgery for low back pain despite evidence it does not help in many cases; unjustified high prices for drugs and physicians and hospitals; excessive administrative costs; fraud and abuse. It is a long, varied list. The unifying theme is that billions of health care dollars aren’t buying what they are supposed to buy: improved health. If a third of health care spending is wasteful, as commonly cited, that translates to 6% of GDP and about $3,500 per person annually.

Beyond that, high health spending exacerbates inequality in American society, Cutler wrote. Extraordinarily expensive health care leads to expensive health insurance premiums while income has been stagnant or falling for many Americans. Among the consequences, in Cutler’s view, are a shrinking proportion of Americans with private insurance—about two thirds of the population—and public payers resorting to rationing. (Cutler cited the hepatitis C drugs as an example of rationing. Most state Medicaid programs and prisons restrict access to the drugs to a subset of patients.) “If U.S. society wants to address issues of income inequality, we need to free up resources invested in health care,” Cutler wrote.

Why can’t we reduce? 

The failure to tame health care costs hasn’t been for lack of trying. Electronic medical records, disease management, consolidation of hospitals and insurers, the value-based care movement—they all have been justified as helping to lower health care spending, notes Anderson.

Some theories about America’s high spending don’t hold up to scrutiny. Papanicolas’ analysis debunked the idea that Americans are getting more services than people in other countries; utilization rates in the U.S. are similar to those in other nations. And the suggestion that low U.S. spending on social services causes high health care spending also didn’t prove out in her analysis. U.S. social spending in 2015 was 16.1% of GDP, just slightly below the average of 17% of 10 other high-income countries; when education is added to the mix, the U.S. spends 2% more than the OECD average.

The most obvious explanation is the simplest: high U.S. prices. In every category of health spending for which her research team could find comparative data, the U.S. paid the most—by far.

“The pricing problem is everywhere in the system,” Papanicolas says. “And I’m not just saying highest in the pack; spending in the U.S. is an outlier compared to other countries.”

That’s what Anderson has been saying for years. He and three colleagues first documented the huge disparity in prices between the U.S. and other countries in their famous “It’s the Prices, Stupid” article in Health Affairs in 2003. Earlier this year, three of the authors paid tribute to a fourth, Uwe Reinhardt, who died in 2018, by revisiting the topic. “It’s Still the Prices, Stupid,” published in the January 2019 issue of Health Affairs, confirmed their original findings and documented a new twist. In 2000, private insurers in the U.S. paid about 10% more for health care services than public insurers did; by 2017, they are estimated to have paid 50% more.

U.S. health care, in which consolidation has created near-monopolies in many communities and price transparency is rare, doesn’t function as a market that works to keep prices in check. Price regulation from outside the market may be the only way to tether the upward tendency. Anderson thinks it will be state governments that act to reduce private-sector prices. “The government is probably going to have to do it because the market does not seem to be able to control prices,” he says.


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