Over the past several decades, health care spending has been driven by a variety of factors, including, but not limited to, an aging population, increasing rates of chronic disease, medical advances and new technologies, rising prices, and expanding health insurance coverage. While there are always differences between countries, many of these factors that cause health care spending growth in the U.S. also cause health care spending growth in other countries. For example, while the U.S. population is indeed aging and this is causing health care costs to rise, in many large and wealthy countries the population is aging even faster.
Other factors may also account for the relatively high health care costs in the United States compared to other countries. The US health care system is fragmented, with many private and public payers, and regulation of these payers is divided between the states and the federal government. However, these features are not unique to the US. Indeed, some other countries with much lower health care costs have multiple private payers or differences in public programs across states or provinces. Nor is the U.S. alone in having a largely fee-for-service payment system.
The U.S. health insurance system is largely voluntary, whereas in similar countries it is almost entirely compulsory. In addition, the U.S. federal and state governments are generally less involved in direct regulation or harmonization of health care and prescription drug prices than governments in similar large and wealthy countries. Prices for the same brand-name prescription drugs, hospital procedures, and physician services are often higher in the United States than in similar large and wealthy countries.
There are other factors largely beyond the control of the health care system that likely also play a role, such as socioeconomic conditions (e.g., income inequality and other social determinants of health), as well as differences in so-called lifestyle factors (e.g., diet, drug use, or physical activity) that may contribute to both higher costs and worse outcomes.
By breaking down total national health expenditure into its components, it is possible to identify the major drivers of health expenditure and to determine where cost containment efforts can be most effective. The charts below illustrate different ways to examine the major components of health spending. For example, the National Health Expenditure Accounts show trends in health care spending by type of service (e.g., hospital care versus prescription drug retailing) or funding source (e.g., private health plans versus public programs). An alternative and relatively new approach to understanding health care spending is to divide total health care spending by the share that goes to treating specific diseases (e.g., cardiovascular, cancer). Finally, health care spending can be better understood by examining price (e.g., dollar amount per hospital stay) and utilization (e.g., number of hospitalizations) dynamics.
Hospital and physician services account for half of all health care spending
Hospital and physician services account for the bulk of healthcare spending in the U.S. and peer countries, followed by prescription drugs. In 2022, in the U.S., hospital spending will account for nearly one-third (30.4%) of total health care spending and physician/clinic spending will account for 19.8% of total spending. Compared to other large and wealthy countries, higher U.S. spending on inpatient and outpatient care explains the vast majority of higher overall health care spending.
Rising costs for hospitals, doctors and drugs
In the 1970s, growth in spending on hospitals outpaced growth in spending on other services, while spending on prescription drugs and doctors/clinics grew faster in the 1980s and 1990s. Prescription drug retail spending will grow the fastest between 2020 and 2022, at 7.6 percent, following an average annual growth rate of 3.3 percent between 2010 and 2020. Hospital and physician/clinic spending growth will average 3.4% and 4.0% from 2020 through 2022, respectively.
On a per patient basis, private insurance costs have generally grown much faster than Medicare and Medicaid costs
From 2008 to 2022, private insurance spending per patient grew 61.6% - much faster than the growth in Medicare and Medicaid spending (40.8% and 21.7%, respectively). Generally, private insurance pays more for health care services than Medicare and Medicaid.
In 2022, Medicaid spending per insured increased 2.2 percent from the previous year, and private insurance and Medicare spending continued to grow (4.3 percent and 3.8 percent, respectively). Medicare and private insurance spending per insured continued to grow faster in 2021 and 2022 after slower growth in 2020. Medicaid spending per enrollee declined in 2021 as overall enrollment increased, especially among children and nonelderly adults, who typically have lower spending per enrollee.
A significant part of health care expenditures is allocated to the treatment of diseases of the circulatory system and musculoskeletal apparatus
An alternative way to examine the components of health care spending is to use the Bureau of Economic Analysis (BEA) Health Satellite Account, which estimates spending and price growth by disease category (e.g., cancer, infectious diseases). This approach differs from the official categorization of health care spending by type of service (e.g., provider services). In essence, the new satellite account redefines a "commodity" in health care as treatment for specific diseases, rather than a hospital stay or a doctor's visit. BEA researchers found that the largest categories of health care spending include treatment of circulatory diseases (10.4% of health care spending in 2021), musculoskeletal disorders (9.4%), and infectious diseases (9.0%). Another large share of health expenditures (15.1%) is for "undefined conditions", which may include routine examinations and follow-up care that are not easily attributed to a specific disease.
Health care expenditures are a function of prices and utilization
Costs for medical services usually depend on prices (e.g., the dollar amount charged for a hospital stay) and utilization (e.g., the number of hospital stays).
People and health plans in the United States often pay more for the same prescription drugs or hospital procedures than in other large, wealthy countries. Meanwhile, there is little evidence that people in the U.S. use more health care services. Moreover, Americans on average stay in hospitals less and visit doctors less often per capita. Thus, much of the difference in health care spending between the U.S. and other countries can be explained by higher prices rather than higher utilization.
Nevertheless, over time in the U.S., prices and utilization have driven health care spending growth to varying degrees. In the 1980s and early 1990s, growth in the prices of health care services far exceeded growth in utilization. The faster growth in U.S. health care prices during this period contributed to the divergence in per capita health care spending between the United States and other large and wealthy OECD countries. Although U.S. health care prices have risen more moderately in recent decades, health care prices continue to exceed spending by other countries.
Recently, the COVID-19 pandemic has led to fluctuations in the utilization of health services. At the beginning of the pandemic, many health services, such as routine surgeries, were postponed or canceled, and many people chose not to seek medical care to avoid infection in health facilities. In 2021, the use of health services increased by 8.6%. This increase in health service utilization in 2021 followed a sharp decline in health service utilization in 2020. Prices for medical services increased moderately by 2.9 % in 2021. Recovery in service utilization and labor force pressures are expected to put upward pressure on prices in recent years.