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Health Care: Two Primary Concerns
The two primary concerns expressed about health care in America have been that overall health
care spending has been rising and that the distribution of health care is unequal.
Health care spending as a percentage of GDP grew from 5.7% in 1965 to over 17% in 2013.
According to the Department of Health and Human Services, health care spending in the U.S.
was about $2.9 trillion in 2013. Both total health care spending and the percentage of GDP
devoted to health care spending are much higher in the U.S. than in other developed countries.
According to the Congressional Budget Office, about half of increased health care spending has
been caused by “expanded capabilities of medicine brought about by technological advances”.
Example 9A: Until the last forty years, coronary artery disease was inexpensive to treat because
there was no effective treatment. Various technological advances for diagnosing and treating
coronary artery disease (e.g. coronary angiography, bypass surgery, thrombolytic therapy, etc.)
have made treatment of coronary artery disease much more expensive (and effective).
Example 9B: Other examples of technological advances include renal replacement therapy for
kidney failure, bone marrow or stem cell transplantation, neonatal intensive care, joint
replacement, and diagnostic imaging (CT scans, MRIs, ultrasounds, and nuclear scans).
Other factors that have contributed to the increase in health care spending include:
1. Increasing third-party payment of health care expenses. The percentage of health care
payments that were made by consumers out-of-pocket decreased from 52% in 1965 to 12% in
2012. Most health care payments are now made either by governmental health insurance
(Medicare, Medicaid, Children’s Health Insurance Program, etc.) or by private health
insurance. A health care purchase involves more administrative cost when there is a thirdparty
payment instead of an out-of-pocket payment. Increasing third-party payment has also
increased the consumer demand for health care.
Example 10: If car insurance was as comprehensive as most health insurance, it would
reimburse not only for major costs like accident repairs, but also for basic maintenance like oil
changes. If car insurance paid 80 percent of the cost of an oil change, a car owner would want
more oil changes and would be less concerned about finding the cheapest provider. And if the oil
change provider suggested an additional service, such as a cooling system flush, the car owner
would be likely to authorize the service if car insurance would pay 80 percent of the cost. Thus,
car insurance would be much more expensive than it currently is, as car owners would essentially
be pre-paying for car maintenance. Administrative cost would also be greater, since paperwork
would have to be processed for every oil change, tire replacement, etc. More importantly, it is
economically inefficient to produce a cooling system flush at a cost of $80 if the car owner does
not value the service at $80.
2. Increasing prices in the health care sector. Prices in the health care sector have been
rising more than twice as fast as the overall price level.
Example 11: From 1965 to 2013, the overall GDP deflator increased by about 570%. The health
care portion of the GDP deflator increased by about 1400%.
3. Increasing real personal income. Real personal income more than quadrupled between
1965 and 2013. As real personal income has increased, the demand for health care has
proven to be income elastic, with the demand for health care increasing faster than real
personal income.
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4. Increasing percentage of the population that is 65 years or older and/or overweight.
Agriculture and Health Care 30 - 6