This is part one of a two-part blog post on the causes of the rate of growth in health care spending and strategies to reduce it. This post will focus on the causes of health care spending growth. The next post will focus on strategies for slowing the growth in spending.  

The U.S. debt ceiling debate was a master class in political dysfunction. However, in the midst of the political infighting and false debates about the merits of raising revenue versus slashing spending, one firm fiscal fact remained: unless the U.S. can slow the rate of growth in health care spending, we’re going to keep having these paralyzing debt debates time and time again. More than that, unless we get a hold of rising health care spending, the U.S. isn’t going to be able to make the kind of investments in infrastructure and education that are crucial for guarantying long-term economic growth and our global competitiveness. 

In what follows, I want to explore the facts and fallacies about U.S. health care spending and explore directly how the amount we’re spending on health care is acting as a drag on the rest of the economy. In my next post, I’m going to explore the strategies at our disposal to slow the rate of growth in health care spending in the U.S. 

In isolation, rising health care spending is not a bad thing. We know that as countries grow richer, they tend to spend more on health care. Indeed, that’s not surprising since as wealth increases, the value of additional years of life also goes up. The problem with U.S. health care spending is that even after adjusting for wealth, the U.S. spends staggeringly more (about $3,000 per person) than other wealthy nations without, for the most part, any commensurate health gains. 

There are two ways to think about the growth in health care spending. One way is to consider the factors that have caused health care spending to rise over the past 60 years. The other is to think about the factors that influence the variation in spending that we see today. 

When we consider health care spending over time, work by the McKinsey Global Institute has estimated rising global wealth was only responsible for about 20 percent of the growth in health care spending. Instead, there is a firm consensus that new technology and more intensive care per episode of treatment is what has made health care in the U.S. more expensive over time. Along those lines, looking forward, the Congressional Budget Office has estimated it’s actually the intensity of medical care, not population aging, which going to make the largest contribution to overall health care spending. This suggests that if we want to reduce health care spending growth in the country, then we need to make the U.S. health system more productive and produce better outcomes for the same or lower costs. 

Right now, the evidence on the relationship between health care spending and medical outcomes in the U.S. is not positive. Simply put, spending more does not produce better health care outcomes. The Centers for Medicare and Medicaid have found that states that spend the most tend not to have the best outcomes. Likewise, Elliot Fisher and his colleagues at Dartmouth have convincingly demonstrated that the highest quality hospitals in the country, like the Mayo Clinic, not only offer better care, but they also tend to spend less to do so.  

If we look at health care spending across countries today, there’s a large body of work examining how U.S. health care spending compares with spending in other nations, relative to performance. Here, recent work by Cutler and Pozen has found that the costs of producing care alone (i.e., excluding the role of insurance) are 120 percent higher in the U.S. than Canada. This begs the question of why the U.S. spends more and what accounts for this difference. More than anything else, analysts have attributed the difference to the costs of administration. Unfortunately, American nurses and doctors spend less time delivering care and more time wrestling with bureaucracy and pushing paper than their Canadian counterparts. 

Then there’s the issue of how health care spending is distributed across the population. We often talk about health care spending per capita – i.e., how much the U,S, spends per person in the country. This creates the very false impression that each of us spends roughly the same amount on our health care annually. However, that could not be further from the truth. The analysis of health care spending in the U.S. by Berk and Monheit has found that the most expensive 1 percent of the U.S. population spend 27 percent of our health care dollars. Likewise, the most expensive 50 percent of the population are spending 97 percent of what’s spent in the U.S. on health care. 

Now, we would not complain if the U.S. auto industry were rising 2.5 percent faster than inflation. So, why we worry about health care spending?  

The answer is three-fold. 

First, as I’ve discussed, there is strong evidence, which suggests that higher health care spending in the U.S. does not produce better health care outcomes. This means we’re spending money that could likely be better served in other areas of the economy. At the federal level, spending on health care is crowding out spending in other areas like national defense and crucial investment in investments in infrastructure and early childhood education that tend to yield larger benefits for the population. 

Second, the bulk of our health care spending is concentrated around paying for care for a small percentage of our population. Further, a substantial portion of health care spending goes towards end-of-life care. Now contrast that with programs where we all invest and collectively benefit. Now, this isn’t to say that we should divert spending away from the sick or cease to provide world-class care for those in the last stages of their life. However, it does suggest that if we continue to see health care prices explode upwards, then a growing share of the federal budget will be spent on a rapidly shrinking percentage of the population. 

Finally, rising health care spending is not an engine to drive overall economic growth. For the most part, health care is a good we cannot export and it is not something we cannot trade. Instead, good health (the beneficiary of health care spending) is useful for creating the conditions necessary for the population to work in industries that can meaningfully create economic growth and drive innovation. Yet unfortunately, at present, our unproductive health system is actually serving as a drag on our economy.  

Take American manufacturing as an example. Right now, the costs of health care are built into the price of American goods that are facing competition from overseas competitors. Since the U.S. spends more on health care, they need to be more productive in their production in order to price their goods competitively. As a result, American firms can still be more productive, but the profits from those productive gains stand to be lost because rather than showing up in the form of higher wages for employees, they’re being spent paying for higher health care costs without measurable gains.

 Stay tuned for the next post where I’ll explore the broad strategies for reducing health care spending.

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Columnist Zack Cooper is a health economist working at the Centre for Economic Performance at the London School of Economics. His column for the Health Policy Forum considers health policy and politics, often from the international perspective. Columnists are regular contributors to the Health Policy Forum who pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions.