The Effects of the Rising Cost of Healthcare on U.S. Expenditure

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INTRODUCTION
The rate of growth in health care spending in the U.S. has outpaced the growth rate in the gross domestic product (GDP), inflation, and population for many years. Between 1940 and 1990, the annual rate of growth in real health spending per capita ranged from 3.6% in the 1960s to 6.5% in the 1990s. In addition, the share of GDP accounted for by health care spending rose from 4.5% in 1940 to 12.2% in 1990. In 2005 health care spending was nearly $2 trillion, or $6,697 per capita, which represents 16% of GDP (Catlin, 2007). The sustained increase in U.S. health spending over the previous four and half decades is likely to continue, and total spending on health is projected to reach $4 trillion, 20% of GDP, by 2015. These figures make the U.S. a clear leader in international comparisons of health care spending (Catlin, 2007). For example, per capita spending in the U.S. exceeds the level in the next 3 closest countries by more than 50%. Similarly, the share of GDP devoted to health care in the U.S. surpasses that in other developed nations by a wide margin. This sustained increase and high level of spending on health care in the United States has been the subject of discussion and scrutiny for several decades. Concern has intensified recently as both research studies suggest that continued rapid growth in spending may harm the U.S. economy (Downey, 2004). Health care spending affects the economy in diverse and complex ways, and effects may differ across sectors of the economy. For example, commentators have noted that although health care spending may hamper broad economic growth, it may also stimulate economic growth and prosperity in certain sectors of the economy (Downey, 2004). The dramatic increases in health care spending and the share of GDP devoted to health care have raised concerns about the negative impact of health care cost inflation on the U.S. INTRODUCTION

economy. In an era of global economic markets, these concerns are reinforced by the status of the U.S. as a spending leader among competing nations. The major concern is that rapid increases in health care spending can affect major economic indicators such per capita GDP, employment and inflation. The effects are likely to occur across all sectors of the economy – governments, businesses and households – as all these interrelated sectors play an important role in the provision, financing and consumption of health care in the U.S (Cutler, 2003). For example, Federal, state and local governments collect taxes from businesses and households to finance public health insurance programs and to directly provide health care to households. Businesses provide employment to U.S. households and also provide health insurance to their employees. Households are the final consumers of health care and also bear some incidence of health care costs. In this report we separately identify the effects of health care costs on the economy. However, it is important to note that the effects of health care costs on one sector are likely to affect outcomes in other sectors (Cutler, 2003). For example, faced with rising health care costs governments might attempt to reduce health spending by reducing eligibility for public health insurance, consequently increasing insurance rates among households. The increase in health care costs might also prompt governments to raise taxes, increase borrowing or reduce investments in other critical sectors such as education and infrastructure, suppressing economic growth and affecting both businesses and households (Kaiser, 2007). Similarly, U.S. companies faced with rapidly growing health care costs might reduce employment and investments in the U.S economy. Rising health care costs could also fuel inflation in the U.S. and make U.S. goods and services less competitive in international markets INTRODUCTION

over time, because increasing health care costs might eventually be reflected in higher product prices....
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