DataWatch. Exhibit 1 Health Care As A Percentage Of The GNP,

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1 DataWatch National Medical Care Spending by Gerard F. Anderson In 1985, the United States spent 10.6 percent of the gross national product (GNP) on health care, continuing a trend of devoting an increasing share of national resources to health care (Exhibit 1). In 1929, the first year that records were compiled, health care expenditures represented only 3.5 percent of the GNP. By 1965, they increased to 5.9 percent; by 1975, 8.3 percent; and by 1984, 10.4 percent. In 1985, when expenditures reached $425.0 billion or 10.6 percent of the GNP, the United States economy had to work from January 1 to February 8 simply to pay its health care bill (Exhibit 2). The proportion of resources spent on health care in the United States Exhibit 1 Health Care As A Percentage Of The GNP, Source: Calculated from data from Office of Actuary, Health Care Financing Administration. July Gerard F. Anderson is associate director of The Johns Hopkins University Center for Hospital Finance and Management and an associate professor in the Department of Health Policy and Management in the School of Hygiene and Public Health. A well-regarded health policy analyst, he sewed in the Department of Health and Human Services from 1978 to 1983.

2 124 HEALTH AFFAIRS Fall 1986 Exhibit 2 National Health Expenditures In 1985, By Type Of Expenditure And Source Of Funds (Dollars In Billions) is significantly higher than in most other developed countries. This is shown in the accompanying DataWatch on international health spending in this issue. During a period when the United States is running a substantial trade deficit and having difficulties competing in international markets, it is not surprising that controlling health care costs remains an important economic and public policy concern. 1 Health care costs increased 8.9 percent during While this was the slowest rate of increase during the past twenty years, it was still much faster than the increase in the overall inflation rate (3.2 percent) or the increase in the gross national product (5.7 percent). Real increases in the expenditures for health care, after adjusting for inflation and population growth were 2.3 percent during 1985 (Exhibit 3). This growth rate is similar to the average 2.7 annual growth rate in service intensity that occurred from 1974 to 1984 and suggests that health care payment reform has done little to control aggregate health care expenditures. Most of the reduction in the rate of increase in health care expenditures can be attributed to the decline in the overall inflation rate. 2

3 Exhibit 3 Factors Accounting For Growth In Health Cate Expenditures DATAWATCH 125 Source: Division of National Cost Estimates, Health Care Financing Administration, August Cost-Containment Strategies The period from 1980 to 1985 was a period of fundamental reform in the health care delivery system, with different payers adopting different strategies for controlling health care costs. Payers tried a variety of eligibility, coverage, cost-sharing, and payment reforms. From 1980 to 1985, health care expenditures rose from $248.1 billion to $425.0 billion, an annualized rate of increase of 11.3 percent. During this same period, the federal government s expenditures on all programs increased by 11.8 percent, while the Medicare program increased at an even faster pace of 14.5 percent (Exhibit 4). State and local expenditures increased by 8.0 Exhibit 4 Annual Increases In Health Care Expenditures By Payer, Source: Calculated from data from Office of the Actuary, Health Care Financing Administration. July 1986

4 126 HEALTH AFFAIRS Fall 1986 percent while state expenditures on Medicaid increased by 9.0 percent. Expenditures in the private sector increased slightly faster (11.7 percent annually) than in the public sector (10.6 percent). Especially rapid increases were experienced by private insurers (16.0 percent). Within specific expenditure categories there were especially rapid increases by certain payers. For nursing homes, direct out-of-pocket expenditures increased 15.5 percent, while expenditures by state and local governments increased by only 6.0 percent. Insurance payments for physician services increased 17.3 percent while direct out-of-pocket expenditures increased by only 4.1 percent, and state and local expenditures increased by 8.0 percent. In contrast, expenditures for medical construction increased slowly for all payers: 6.6 percent for private payers, 5.9 for the federal government, and 2.1 percent for state and local governments. Exhibit 5 Annual Increases In Health Care Exoenditure Bv Type Of Service Source: Calculated from data from Office of the Actuary. Health Care Financing Administration. July

5 DATAWATCH 127 How Is The Money Spent? Certain sectors grew much faster than others as the health care delivery system changed from 1980 to 1985 (Exhibit 5). The largest increases occurred in the prepayment and administration sector, with an annualized increase of 19.6 percent per year. The slowest growing component was construction of medical facilities, which increased at 4.5 percent. In 1985, expenditures for hospital care, physician care, and nursing home care were the three largest expenditure categories and represented two-thirds of all health care expenditures. It is shown as a distribution for per capita expenditures in Exhibit 6. Per capita expenditures for all health care services were $1,721. On average, Americans spend $675 per person on hospital care, $335 on physician care, $48 on government public health activities, and $29 on noncommercial biomedical research. Exhibit 6 Per Capita Expenditures By Type Of Service, 1985 Source: Calculated from data from Office of the Actuary, Health Care Financing Administration. July 1986

6 128 HEALTH AFFAIRS Fall 1986 Many of the initiatives to control health care costs have concentrated on hospital care. Exhibit 7 shows that, despite cost-containment initiatives implemented since 1980, community hospital costs per case have continued to rise at a relatively constant rate. The major reduction in costs can be attributed to a decline in utilization that occurred during this period (Exhibit 8). Exhibit 7 Community Hospital Cost Per Case, Source: American Hospital Association. Office of Public Policy Analysis. Division of Economic Studies. Exhibit 8 Adjusted Patient Days, Source: American Hospital Association. Office of Public Policy Analysis. Division of Economic Studies. Federal Spending The rates of increase in federal spending in the different expenditure categories reflect budgetary priorities. From 1980 to 1985, annual federal

7 DATAWATCH 129 spending on government public health activities increased 1.5 percent, biomedical research 7.3 percent, program administration 9.9 percent, hospital care 11.7 percent, physicians services 15.7 percent, and eyeglasses and appliances 21.2 percent. Out-Of-Pocket Spending Out-of-pocket expenditures contribute different proportions of total revenues for different expenditure categories. In 1985, direct out-ofpocket expenditures for all personal health care services were $105.6 billion or 28.4 percent of all personal health care spending. This varies substantially by ex enditure category. The range is from 0.0 percent for other personal health care and 9.4 percent for hospitals to 76.1 percent for drugs (Exhibit 9). Exhibit 9 Percent Total Revenues From Out-Of-Pocket Payments For Personal Health Services Source: Calculated from data from Office of the Actuary, Health Care Financing Administration. July Since 1980, the overall percentage of funds coming from out-of-pocket payments has remained constant; however, the increase for specific services has changed. The most significant change is that the percentage of hospital revenues generated from out-of-pocket payments has increased from 7.4 to 9.4 percent, while the percentage on physicians services has decreased from 30.6 to 26.3 percent, and the percentage of all other personal health care services has decreased from 57.3 to 55.9 percent. These data suggest that public and private payers are trying to introduce more cost sharing into the hospital sector but are not following the same strategy in other sectors.

8 130 HEALTH AFFAIRS Fall 1986 During the period from 1982 to 1984, major corporations showed increased interest in using cost sharing as a method of cost containment. Approximately half of the members of the Business Roundtable increased the premium or deductible, and over one-third increased the amount of copayment required (Exhibit 10). Exhibit 10 Cost Sharing In Health Plans At Business Roundtable Companies, Source: Dunlop Group of Six, March NOTES 1. Joseph A. Califano, America s Health Care Revolution (New York: Random House, 1986). 2. Jeffrey C. Merrill and Richard J. Wassermann, Growth in National Expenditures: Additional Analyses, Health Affairs (Winter 1985).

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