U.S. Spent $1.4 Trillion on Health Care in 2001

Published February 1, 2003

Americans spent an unprecedented $1.42 trillion on health care in 2001, an average of $5,035 per person, according to a federal report released jointly by the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS). (See accompanying table.)

Total health care spending reached an all-time record and grew at the fastest rate in a decade. Spending on health care was up 8.7 percent from 2000, a year-to-year jump not seen since 1990. While economists have reported increases in health care spending every year since 1970, recent trends have analysts worried the increases are too rapid in a sagging U.S. economy.

Fourteen Percent of GDP

The report noted spending on health care accounted for 14.1 percent of U.S. gross domestic product in 2001, a 0.8 percent rise from the year before. That increase comes after eight years during which health care’s share of GDP was falling, largely due to managed care practices aimed at controlling costs.

Katherine Levit, director of the National Health Statistics Group at CMS, said analysts had not seen such a spike in spending since 1990, when similarly increasing costs led to the rapid rise of HMOs and other types of managed care. Levit, who supervised production of the report, told Reuters, “We probably should be on the lookout for some policy changes or some private sector initiatives that put the brakes on spending growth.”

Published in the January/February 2003 issue of Health Affairs, the spending report found the primary reason for the increase in health spending was increased utilization of medical goods and services by the burgeoning senior citizen population. The economic recession, exacerbated by the September 11 attacks, created added pressure on medical care spending.

Levit explained to the New York Times, “There was some increase in prices, but it was not as large as the increase in quantity. For example, more diagnostic tests were ordered, more days were spent in hospitals, more outpatient services were provided, and there was greater use of technology.”

The accompanying article, “What the Study Found,” highlights the impact of prescription drugs, hospitalization, Medicare, and Medicaid on spending trends.

CMS estimates health care spending could reach $1.7 trillion this year. The continued spending increase will be driven by an undeniable demographic trend: 75 million aging baby-boomers are demanding more freedom in medical care choices while demanding high-quality health care outcomes.

Political Reactions

Health policy experts at the Galen Institute, Heritage Foundation, Brookings Institution, and other think-tanks agree that while high and rising spending levels are not per se evidence of a public policy problem, there is evidence that flawed government programs and regulations account for a substantial portion of current spending. The latest figures add a sense of urgency and purpose to the 108th Congress’s health policy agenda as well as state budget deliberations. Major reforms are on the table as lawmakers debate how best to stem rapidly rising costs in Medicare, Medicaid, and other programs.

With states facing a total of $50 billion in budget deficits and declining tax revenues, many governors have already pared benefits or are restricting enrollment in Medicaid and other state-run health programs, not only for their low-income populations but also for state employees enrolled in state-run health care plans.

Senator Charles E. Grassley (R-Iowa), chair of the Senate Finance Committee, has said he favors offering states short-term grants to help them fund their Medicaid programs. Meanwhile, a Republican congressional aide, requesting anonymity, said lawmakers would likely go beyond short-term fixes and consider structural reforms to make the program more efficient.

According to the GOP aide, Republicans will move this year to enact laws that help states control their spending on prescription drugs and long-term care for elderly and disabled Medicaid patients. “It’s not sufficient to say that we simply need to throw money at Medicaid to fix its problems,” the aide said.

“If this isn’t an argument for Medicare and Medicaid reform, I don’t know what is,” said Tom Scully, administrator for CMS. But liberal Representative Pete Stark (D-California) disagreed, noting “Medicare increased payments to providers and still managed to keep overall spending growth to 7.8 percent in 2001. Meanwhile, private insurance premiums went up 10.5 percent. I cannot understand why Republicans continue to devise plans for turning Medicare over to private health insurers and HMOs.”

Many experts believe private-sector insurance premiums are rising due to cost-shifting by providers, who are trying to recover losses incurred from treating Medicaid and Medicare patients.

The new report makes no attempt to quantify the impact on spending of 1,500 unfunded health benefit mandates passed by state and federal government agencies. Nor does it estimate the effect of the growing regulatory burden on the health care industry, including the extensive compliance regulations embodied in the Health Insurance Portability and Accountability Act of 1996.

Conrad F. Meier is managing editor of Health Care News.