January 14, 2009
Small Business Fact of the Week Financing Health Care Spending It definitely is time for an important reminder on how health care spending is funded in the U.S. Consider the following two tables on the trend in national health expenditures. National Health Expenditures for Select Years: Total, Private Sector and Government (Amounts in billions of dollars) | | Private | | | Government | | Year | Total | Total | Out of Pocket | Insurance | Total | Federal | State & Local | 1960 | 28 | 21 | 13 | 6 | 7 | 3 | 4 | 1970 | 75 | 47 | 25 | 15 | 28 | 18 | 10 | 1980 | 254 | 148 | 59 | 69 | 106 | 72 | 35 | 1990 | 714 | 427 | 136 | 234 | 287 | 194 | 93 | 2000 | 1353 | 757 | 193 | 455 | 596 | 417 | 197 | 2006 | 2106 | 1135 | 257 | 723 | 970 | 705 | 265 |
National Health Expenditures for Select Years: Percent of Total Expenditures (All Values are Percentages) | Private | | | Government | | Year | Total | Out of Pocket | Insurance | Total | Federal | State/Local | 1960 | 75.0 | 46.4 | 21.4 | 25.0 | 10.7 | 14.3 | 1970 | 62.7 | 33.3 | 20.0 | 37.3 | 24.0 | 13.3 | 1980 | 58.3 | 23.2 | 27.2 | 41.7 | 28.3 | 13.8 | 1990 | 59.8 | 19.0 | 32.8 | 40.2 | 27.2 | 13.0 | 2000 | 55.9 | 14.3 | 33.6 | 44.1 | 30.8 | 14.6 | 2006 | 53.9 | 12.2 | 34.3 | 46.1 | 33.5 | 12.6 |
(Data Source: Statistical Abstract of the United States 2009. Also, out of pocket plus insurance do not cover all private expenditures, as there are other private sources.) Three trends are clear. First, government - in particular the federal government - has moved to pick up a much larger share of health spending. While in 1960, government's share stood at 25 percent, with the private sector funding 75 percent; by 2006, the government's share had risen to 46.1 percent, with the private sector was down to 53.9 percent. The federal share went from 10.7 percent in 1960 (actually less than the state and local government share) to 33.5 percent in 2006. Second, private out-of-pocket payments for health spending have fallen most dramatically, from 46.4 percent in 1960 to a mere 12.2 percent in 2006. That means that one way or another, someone else - mainly, the government or private insurance - is paying 87.8 percent of the health spending tab in the U.S. Third, the level of spending has skyrocketed in recent times. On a per capita basis, national health spending increased by 4,442 percent between 1960 and 2006. At the same time, inflation registered 454 percent. Part of that dramatic rise in health spending was the result of positive changes in terms of patient care, including new and improved medicines, medical devices and other treatments. But costs also have been driven higher by the vast expansion in third-party payments. That is, government or employer-provided insurance picking up the tab. When someone else pays, health care providers and consumers have no reason to case about prices and utilization, and hence, costs rise. Much of this shift in recent decades has distorted the true meaning of insurance. Insurance is supposed to protect against large, unforeseen, catastrophic costs. But now, health insurance - via the private sector or government - tends to cover all expenses, even regular, predictable purchases. Again, costs inevitably rise as a result. This trend is critical to keep in mind as we proceed with debating assorted health care measures under a new administration and Congress. If proposals increase the third-party-payer roll, the costs will continue to accelerate. However, if reforms boost consumer control over spending, consumer choices, and competition in health care, then the results will be quite different. Raymond J. Keating, Chief Economist
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