Historical Overview

Health spending in the United States has grown rapidly over the past few decades. From $27 billion in 1960, it grew to $888 billion in 1993, increasing at an average rate of more than 11 percent annually. This strong growth boosted health care's role in the overall economy, with health expenditures rising from 5.1 percent to 13.4 percent of the gross domestic product (GDP) between 1960 and 1993.

Between 1993 and 1999, however, strong growth trends in health care spending subsided. Over this period health spending rose at a 5-percent average annual rate to reach $1.2 trillion in 1999. The share of GDP going to health care stabilized, with the 1999 share measured at 13.2 percent. This stabilization reflected the nexus of several factors: the movement of most workers insured for health care through employer-sponsored plans to lower-cost managed care; low general and medical-specific inflation; excess capacity among some health service providers, which boosted competition and drove down prices; and GDP growth that matched slow health spending growth.

In 2000 and 2001, growth picked up again, increasing 7.4 percent and 8.7 percent, respectively, to $1.4 trillion in 2001. Health spending as a share of GDP increased sharply from 13.3 percent in 2000 to 14.4 percent in 2001, as strong growth in health spending outpaced economy-wide growth. For the 283 million people residing in the United States, the average expenditure for health care in 2001 was $5,035 per person.

Health care is funded through a variety of private payers and public programs. Privately funded health care includes individuals' out-of-pocket expenditures, private health insurance, philanthropy, and non-patient revenues (such as revenue from gift shops and parking lots), as well as health services that are provided in industrial settings. For the years 1974-1992, these private funds paid for 57 to 60 percent of all health care costs. By 1996, however, the private share of health costs had declined to 54 percent of the country's total health care expenditures due primarily to the falling share of out-of-pocket spending, rising slightly to 55 percent in 2001. The share of health care provided by public spending increased correspondingly during the 1992-1996 period, falling slightly during the period 1997-2001.

Public spending represents expenditures by Federal, State, and local governments. Of the publicly funded health care costs for the United States, each of the following accounts for a small percentage of the total: the Department of Defense health care program for military personnel, the Department of Veterans' Affairs health program, non-commercial medical research, payments for health care under Workers' Compensation programs, health programs under State-only general assistance programs, and the construction of public medical facilities. Other activities that are also publicly funded include maternal and child health services, school health programs, subsidies for public hospitals and clinics, Indian health care services, migrant health care services, substance abuse and mental health activities, and medically related vocational rehabilitation services. The largest shares of public health expenditures, however, are made by the programs run by CMS--Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP).

Together, Medicare, Medicaid, and SCHIP financed $470 billion in health care services in 2001--one-third of the country's total health care bill and almost three-fourths of all public spending on health care. Since their enactment, both Medicare and Medicaid have been subject to numerous legislative and administrative changes designed to make improvements in the provision of health care services to our nation's aged, disabled, and disadvantaged.

Projected Expenditures

The latest update of the annual projections of national health spending consists of projections from 2002 through 2012. These projections are made using National Health Expenditure (NHE) historical data through 2001, which were released by CMS in January 2003. The Medicare and Medicaid projections and economic and demographic assumptions are based on the 2002 Medicare Trustees Report and the 2002 Old-Age and Survivors Insurance and Disability Insurance Trustees Report, updated with available information through November 2002. The projections are based on a current law scenario, which assumes no change from the current legislated benefit.

National health expenditures are projected to reach $3.1 trillion in 2012, up from $1.4 trillion in 2001. From 2001 through 2012, health care spending is projected to grow at an average annual rate of 7.3 percent, roughly 2.2 percentage points faster than the GDP rate. As a percentage of GDP, national health spending is projected to reach 17.7 percent by 2012, up from 14.1 percent in 2001. After increasing 8.7 percent in 2001, NHE growth is projected to be 8.6 percent in 2002 and 7.3 percent in 2003. This deceleration would follow 5 consecutive years of accelerating spending growth.

Private personal health care spending growth is expected to decelerate from 7.9 percent in 2001 to 7.4 percent in 2002, and to gradually fall to 6.1 percent in 2012. Much of the long-term deceleration is ascribed to slowing real per capita income growth, an increase in the uninsured population, and increased use of consumer cost sharing by insurers to help contain cost growth.

Growth in private health insurance premiums per enrollee is projected to peak at 11.6 percent in 2002, after increasing 11.1 percent in 2001. Private health insurance benefits per enrollee are projected to slow in 2002 to 8.9 percent, from 10.8 percent in 2001. This divergence is a sign of the current phase of the underwriting cycle, which is projected to reverse in 2003 and help slow overall private health insurance spending growth.

Out-of-pocket (OOP) spending is expected to grow more rapidly over the projection period in comparison to the previous decade because of efforts by employers and insurers to share costs with employees. However, the growth rate of total health spending is still expected to be higher than the growth rate of OOP spending, causing the OOP share of total health expenditures to fall from 14.4 percent in 2001 to 12.9 percent in 2012.

Hospital spending growth, driven by higher labor costs and increased hospital leverage in pricing, is projected to remain the most important driver of health spending growth, increasing 7.4 percent in 2002 after an 8.3-percent increase in 2001.

Spending on prescription drugs--still the fastest growing sector, at 14.3 percent, in 2002--is expected to continue its recent deceleration, partly due to increasingly broad use of tiered copayments and fewer drug introductions. By 2012, prescription drug spending is expected to account for 14.5 percent of total health expenditures, up from 9.9 percent in 2001.

NOTES:
National Health Expenditure (NHE) historical estimates and projections are from the National Health Statistics Group in the Office of the Actuary (OACT), CMS. Refer also to: