Americans Should Get Ready To Spend Even More Of Their Money On Health Care

Imagine spending 20 percent of every paycheck on health care. That’s basically what the U.S. as a whole will be doing in 2026, according to a new federal government report published in the journal Health Affairs on Wednesday afternoon.

If those projections hold up, Americans will be spending an even greater share of gross domestic product on health care than they do now, when roughly 18 percent of GDP goes there. 

And while this report doesn’t make predictions about health care spending in other countries, it’s likely that the gap between what the U.S. and the rest of the developed world spends on health care will also expand ― even though that gap is already pretty big, because nobody else spends as much as Americans do.

This year’s projected increase of about 5 percent is still modest relative to the increases around the turn of the century, when the average was higher than 7 percent and double-digit annual increases were common. Still, the new report raises the same fundamental questions that its counterpart did last year, and the year before, and so many years before that: Why does health care spending keep rising more quickly than incomes, how much of that spending is really worth it, and what, if anything, should the government do about it?

An Acceleration, But Not A Massive One 

Wednesday’s report is the annual update on national health expenditures. It comes from analysts at the Centers for Medicare and Medicaid Services, which is part of the U.S. Department of Health and Human Services, and it is the most authoritative source of information about how much money Americans have been putting into health care, where that money is going, and how those patterns are likely to change in the future.

The main headline from the report is that the government’s analysts expect health care spending to rise by 5.5 percent annually over the course of the coming decade.

That’s an uptick from the recent past. From 2008 through 2013, national health expenditures increased by just 3.8 percent annually ― mostly because, during the recession and its aftermath, people spent less money on medical care because they had lost their insurance or were unable to meet their out-of-pocket obligations.  

The pace of spending growth picked up as the economy strengthened and the Affordable Care Act took full effect, in no small part because so many millions of previously uninsured people suddenly had insurance. Even with that burst of coverage, however, annual growth in health care spending was just 5.0 percent on average between 2014 and 2016 ― or two-tenths of a percent less than what the government expects going forward.

“These projections show health care spending growth continuing to inch upwards, breaking with the unprecedented modest increases we’ve seen in recent years,” said Larry Levitt, senior vice president at the Henry J. Kaiser Family Foundation.

Context matters, of course. The coming acceleration in health care spending still looks pretty small in the context of the 7.3 percent annual growth that the U.S. saw between 1990 and 2007. “While the estimates show health spending growth continuing to outpace the economy as a whole, the gap is still much smaller than it has been historically,” Levitt said.

But, assuming the projections are right, health care spending will rise more quickly than incomes between now and 2026. That means health care spending will place an ever greater strain on employers, government programs and eventually individuals, through some combination of higher premiums, higher taxes and higher out-of-pocket expenses.

The report suggests several factors are driving the increases. One of the biggest is demographics: The population is getting older, on the whole, and older people need more health care ― even though, as retiring baby boomers transition from private insurance to Medicare, they will be moving into a public program that pays less for services and has historically restrained increases better than private coverage.

Another factor, as always, is the price of health care, which the report suggests will rise, in part, as a function of an improving economy, which creates more demand for services.

The level of usage of medical services is also part of the story, although the government’s experts expect that to decline slightly as a factor, in part because ― with repeal of the Affordable Care Act’s individual mandate, which imposes a penalty on people who don’t have insurance ― fewer people will get insurance.

More Spending Can Be Good And Bad 

Increases in health care spending are not always problematic, although the political discussion sometimes treats them that way. As Harvard economist David Cutler notes in a Health Affairs essay accompanying the new report, “there is no economic law that governs how much money should be spent on any industry.” Even as Americans today spend far more on health care than they did a century ago, Cutler points out, they spend far less on agriculture and manufacturing ― which suggests high levels of health care spending are “sustainable” as long as they are worthwhile.

But, as Cutler also notes, there are mountains of evidence to suggest that a big chunk of American health care spending is wasteful, whether because it goes to administration or to care that doesn’t make people better. Americans also pay the highest prices for their medical goods and services, which means not just more expensive drugs and devices but also larger fees for doctors and hospitals.

And as health care gets ever more expensive in relation to incomes, not just poor but even middle-class people will not be able to afford it without greater financial assistance than they receive already ― whether it’s through tax breaks that make private insurance more affordable or government programs like Medicaid that enroll them directly. Either way, making that assistance available takes money that has to come from somebody else’s pockets.

The argument over how to address these problems has been the defining debate in American health care policy for decades.

Liberals (and Democrats) generally favor using government to force down prices, as other developed countries do, while expanding public insurance and subsidies for private coverage. Conservatives (and Republicans) generally favor deregulating industries, on the theory that market forces can reduce spending more effectively, and requiring individuals to bear a greater share of their own medical costs, so that they will shop for and consume health care with more eye to value. 

Wednesday’s report is unlikely to change that clash of principles. It’s simply a reminder that the debate remains as pressing as ever.

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