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The United States healthcare system is the most expensive in the world, and our healthcare costs are projected to keep rising — faster than inflation, the economy, or wages. Despite these high costs, our health outcomes are generally no better than those of our peers, and in some cases are worse.
Although the U.S. spends more on healthcare than other countries, its health outcomes are generally no better
(1st is preferable)
Heart Attack Fatalities
12th out of 32
Expected age of death for individuals currently age 65
|22nd out of 34
|25th out of 34
Deaths per 1,000 births
|31st out of 34
Hospital admission rates, adjusted for age and sex, per 100,000 people
|27th out of 28
Accidental puncture or laceration, rates per 100,000
|16th out of 19
SOURCE: Data from OECD, Health Data 2013, June 2013.
Note: Data for 2011 or latest available.
In 2012, total national spending on healthcare was $2.8 trillion, or 18 percent of the economy. Healthcare's high costs make it an important component of the budget in the short-term, and its projected growth path makes healthcare one of the primary drivers of our nation’s fiscal challenges in the long-term.
This primer provides a brief overview of some of the major federal healthcare programs, and also examines the high costs of healthcare economy-wide (both public and private sectors) as well as the outlook for future health spending.
The federal government spends, on net, about $1 trillion each year on healthcare1 and has become the largest single payer of healthcare costs, footing about one-third of the nation’s total bill. Many different groups of people benefit from these programs, including the elderly, the disabled, military and civilian federal employees, and low-income children and their families.
The two largest federal healthcare programs are Medicare and Medicaid. Together, these programs cover more than one-third of all Americans, and cost, on net, over $700 billion per year. (See these PGPF explainers for more information on Medicare and Medicaid.)
Medicare is a major player in our nation’s healthcare system. The program covers 50 million elderly and disabled people. It pays for nearly 45 percent of all home health spending in the country, nearly 30 percent of all hospital bills, and more than 20 percent of all nursing care expenses. In total, Medicare finances 21 percent of all healthcare spending in the country.
Medicaid, which provides insurance for low-income people, also pays for a wide variety of services, and covers 71 million Americans. The program pays for 40 percent of births in the U.S., and is the largest single payer of nursing home services. Although Medicaid serves both young and old people, more than half of its spending goes to elderly and disabled beneficiaries. Medicaid is funded jointly by the federal government and the states. In total, Medicaid finances 16 percent of all healthcare spending in the country.
Health exchange subsidies, which were authorized by the Affordable Care Act (also known as "Obamacare"), are going to represent a larger part of the budget in the coming years. Beginning in 2014, exchanges will be administered by states and offer health insurance policies directly to individuals. To encourage broader participation in the insurance market, the federal government will provide premium and cost-sharing subsidies to individuals of low or modest incomes who purchase on the exchanges. CBO currently estimates that more than 20 million people will have purchased insurance on the exchanges by 2016.
Public and private healthcare costs in the United States are high for many reasons. A significant portion of healthcare in the United States is financed through "fee for service" payments. This type of system pays health providers for services they deliver, but not necessarily for quality of health achieved. Because providing more services produces more payments, fee-for-service can encourage unnecessary, ineffective, or even harmful care.
Fee-for-service alone, however, cannot fully explain our country’s high health costs. Other factors also contribute:
Reducing healthcare costs will require reforming the incentives for consumers, providers, and payers so that wasteful and ineffective care is reduced or eliminated, while patients continue to receive the care they need. Accomplishing that task will not be easy.
Healthcare reform needs to balance a set of legitimate concerns. Patients want to protect their access to care. Providers and hospitals must meet their own costs. The government needs to watch its bottom line. And taxpayers want their money to be spent responsibly.
These goals are not always aligned, and the push and pull of the democratic process makes balance difficult to achieve. Most would agree, however, that it would be better to eliminate wasteful spending than to reduce access to necessary and effective care.
Healthcare is the major driver of the projected federal spending growth over the long term
SOURCE: Peter G. Peterson Foundation projections based on data from the Congressional Budget Office, Updated Budget Projections: Fiscal Years 2013 to 2023, May 2013, and The Long-Term Budget Outlook, June 2012.
NOTE: Projections are based on CBO’s definition of current policy. The projections assume that excess health care costs grow halfway between CBO’s June 2012 assumptions and 0 percent.
In considering these issues, we must recognize that the outlook for healthcare costs is daunting. Although the growth in healthcare costs has moderated in the last few years, according to government projections, total healthcare spending could still climb to nearly one-quarter of our entire economy within the next 25 years. Over the same period, federal spending on healthcare is projected to nearly double. Changing the way healthcare is delivered and financed in the future will require changes to the way our whole society — families, the elderly, employers, insurance companies, providers, the legal system, and, of course, governments — thinks about healthcare.
1 On gross, the federal government is projected to spend $1.1 trillion on healthcare in 2013 and collect about $120 billion in premium payments, resulting in a net cost of $980 billion. (Back to citation)