Academic journal article Health Care Financing Review

Monitoring Health Spending Increases: Incremental Budget Analyses Reveal Challenging Tradeoffs

Academic journal article Health Care Financing Review

Monitoring Health Spending Increases: Incremental Budget Analyses Reveal Challenging Tradeoffs

Article excerpt


The tradeoffs required to finance health care spending have become increasingly challenging for both private and public payers. In the private market, the rate of this spending growth may limit the enrollment, breadth, and depth of health care coverage, and in the government budget process, the rapid pace poses both short- and long-term financing challenges as mandatory spending grows faster than discretionary spending. In this article, we compare the incremental or marginal increase in U.S. health spending to that of GDP, Federal outlays, and State and local government expenditures. When viewed relative to the constraints in financial resources, these incremental changes in health spending provide a better understanding of the implications of decisions made by our Nation's health policymakers and financers of health care.

For almost all of the past 40 years, growth in health care spending has outpaced economic growth. For the public sector, this increased spending has meant more government health coverage for a variety of populations, including people with low incomes, the working poor and their children, the elderly, and the disabled. In 1960, spending on public programs accounted for 25 percent of national health expenditures (NHE), but reached 45 percent of health expenditures by 2004 (Centers for Medicare & Medicaid Services, 2006). Within the private sector, the breadth of private health insurance coverage grew as consumer out-of-pocket spending declined, while health insurance premiums outpaced wage growth. Consequently, the health spending share of GDP more than tripled between 1960 and 2004, as it rose from 5.2 to 16.0 percent of GDP. CMS is projecting health spending to absorb an even higher share of GDP over the next decade, likely influencing the ability of governments to pay for education, defense, transportation, and other vital services.

Because resources are limited, the growth in health spending can elicit tradeoffs that are often difficult to conclusively track. Of particular concern is the increase in the health spending share of economic growth and of government outlays. For instance, health care spending absorbed well over one-half of the nominal increase in Federal Government outlays in 1993 and 27 percent of the nominal increase in the economy over the 2000-2004 period. Federal and State governments face increasing demands in providing care for low-income, elderly, and disabled individuals and will encounter even more in future years as the baby boom generation retires. In the Medicare Program, the large increase in the number of beneficiaries and in per-beneficiary spending is expected to propel spending growth even faster, while current growth already outpaces that of the Federal budget. Furthermore, an increasing proportion of total Medicare spending is expected to be financed through general government revenues, and as this occurs, the challenges of paying for Medicare and other programs will become more explicit (Board of Trustees, 2006). Concern over this has prompted a proposal in the 2007 Presidential budget that allows for an across-the-board 0.4 percent cut to Medicare spending if general revenue funding reaches 45 percent of total funding (U.S. Office of Management and Budget, 2006a). If promised benefits are paid, challenging consequences--such as a higher budget deficit or increased taxes--may result (Penner, 1999). Alan Greenspan recently told lawmakers that the Federal budget is on an unsustainable path and suggested that changes in Social Security retirement and Medicare benefits be made sooner rather than later (Andrews, 2005).


The average health spending share of GDP is frequently cited as a measure of the ability and willingness of society to purchase health care. While the average share yields information about the magnitude of health spending in relationship to GDP, it does not indicate whether health spending increased its share of total spending relative to all other spending in a given year. …

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