1.1 Growth in Health Spending, 1929 to Present

Module by: Christopher Conover. E-mail the author

Summary: Over eight decades, constant dollar U.S. health spending per person increased five times as much as real output per capita

Spending on health care in the United States has increased more than 60-fold since 1929.1 This remarkable growth is measured in constant dollars that equalize general purchasing power across decades.2 In contrast, the U.S. economy grew only 12-fold over the same period (figure 1.1a).

National health expenditures (NHE) and NHE per capita are the best available single measures of the size of the health sector.3 NHE reflects the total amount of spending on health care, including goods and services having to do with personal health care, public health activities, public and private health insurance, related investments in research, and capital investment.4 Both gross domestic product (GDP) and NHE measure output only within the borders of the United States.5

The U.S. population is approximately 2.5 times as large as it was in 1929. Even when considering spending growth in per capita terms, inflation-adjusted health spending was 25 times as large at the end of these 80 years as at the start. GDP per capita quintupled (figure 1.1b). Does this mean that today’s average Americans receive 25 times as much medical care as their counterparts did in 1929? It does not. Figures 1.1a and 1.1b show how the total dollars spent on health care changed over time, but the estimates shown are adjusted only for changes in general purchasing power rather than purchasing power within the health sector. Devoting 25 times as much real economic output to purchasing medical care is not equivalent to saying that U.S. residents receive 25 times as much medical services (for example, physician visits, hospital days) as they did in 1929.

The GDP implicit price deflator is the most comprehensive measure of pure price inflation for the economy as a whole. The Consumer Price Index (CPI) is better known but covers only approximately 60 percent of the economy, omitting rural areas, government purchases, and investment goods. Because half of health spending currently is publicly funded, it is more accurate to use a price index, such as the GDP deflator, that broadly reflects the entire economy. Adjusting NHE by the GDP deflator reflects the opportunity cost of health care, which measures how the total value of other goods and services that society could have purchased instead of health care has changed over time, while excluding a cause of growth—economy-wide inflation— largely beyond the control of the health sector.

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This work is licensed by Christopher Conover under a Attribution (CC-BY 3.0), and is an Open Educational Resource.

Last edited by Brenton Haack on Jul 24, 2013 3:07 pm -0500.