April 20, 2020

Why Are Americans Paying More for Healthcare?

The United States spends significantly more on healthcare compared to other nations and such spending is expected to continue growing. That trend will exacerbate the nation’s growing debt and is particularly problematic because it does not result in better health outcomes. High costs of healthcare can also hinder the efforts to thwart public health crises like the COVID-19 outbreak as people are unable to pay for tests or treatments. Below is a look at the increasing healthcare costs in the United States and what is causing that rapid growth.

How Much Does the United States Spend on Healthcare?

The United States has one of the highest costs of healthcare in the world. In 2018, the United States spent about $3.6 trillion on healthcare, which averages to about $11,000 per person. Relative to the size of the economy, healthcare costs have increased over the past few decades, from 5 percent of gross domestic product (GDP) in 1960 to 18 percent in 2018. The Centers for Medicare and Medicaid Services (CMS) project that by 2028, such costs will climb to $6.2 trillion, or about $18,000 per person, and will represent about 20 percent of GDP. However, those projections do not take into account the impacts of the COVID-19 pandemic; while the extent of the effect is still uncertain, testing and treatment costs are expected to be high and can potentially drive the cost of healthcare up.

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Why Is Healthcare Spending Increasing in the United States?

Generally, healthcare spending can be thought of as a function of price (dollars charged for healthcare services) and utilization (the amount of services used). There are several underlying factors that can increase price and utilization, thereby boosting spending on healthcare. The most notable of those factors are an aging population and rising healthcare prices.

An Aging Population

In 2018, individuals age 65 and over accounted for 16 percent of the U.S. population. The U.S. Census Bureau projects that this figure will exceed 20 percent by 2030. Since people age 65 and over, on average, spend more on healthcare than any other age group, growth in the number of older Americans is expected to increase total healthcare costs over time.

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Furthermore, as individuals turn 65, they will become eligible for Medicare. As a result, the number of Medicare enrollees is expected to increase from 60 million in 2018 to 75 million by 2028. That expansion in enrollment is expected to significantly increase the cost of Medicare over time. In fact, the Congressional Budget Office projects that Medicare spending will double over the next 30 years relative to the size of the economy — growing from 3 percent of GDP in 2019 to 6 percent by 2049.

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Increasing Costs

Prices are another significant driver of healthcare spending in the United States; the cost of healthcare services has grown faster than the cost of other goods and services in the economy. In the past 20 years, the Consumer Price Index (CPI) — the average change in prices paid by urban consumers for various goods and services — has grown annually at an average of 2.1 percent while the CPI for medical care has grown at an average rate of 3.5 percent per year.

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There are many possible reasons for this increase in healthcare prices:

  • The introduction of new, innovative healthcare technology can lead to better, more expensive procedures and products.
  • The complexity of the U.S. healthcare system can lead to administrative waste in the insurance and provider payment systems.
  • The consolidation of hospitals can lead to a lack of competition or even a hospital monopoly, granting providers the opportunity to increase prices.

More research needs to be done, though, to confirm the reasons that healthcare costs grow so quickly.

Why It Matters

High healthcare spending is not necessarily a bad thing, especially if it leads to better health outcomes. However, that is not the case in the United States. When evaluating common health metrics, the United States lags behind other countries despite higher healthcare spending.

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High healthcare costs put pressure on an already strained fiscal situation. Containing our rising healthcare costs is important for our nation’s long-term fiscal and economic well-being. For ideas on how to solve some of these issues, visit our Solutions page and the Peterson Center on Healthcare.    


Related: Infographic: U.S. Healthcare Spending


Image credit: Photo by Chip Somodevilla/Getty Images

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