U.S. Healthcare Spending: Out of Control

At last count, the United States was spending more than $8,000 a year on healthcare for every man, woman, and child in the country. That’s more than $24,000 for a family of three, and it represents almost one-fifth of all consumption spending. Is it necessary to spend this much? If not, why are we doing it? What happens if we continue? How can we stop?

For the past 40 years, healthcare spending has been rising at twice the rate of growth of our income. You don’t have to be an accountant, a mathematician, or an economist to realize that this is unsustainable. If the cost of something you are consuming is growing twice as fast as your income, eventually it will crowd out everything else in your budget. In fact, if we continue on the path we are currently on, healthcare will crowd out all other forms of consumption by about midcentury. When today’s young people reach retirement age, they will have nothing to eat, nothing to wear, and no place to live. But they will have an enormous amount of healthcare. Clearly, that’s not where anyone wants to end up.

Long before healthcare spending crowds out every other form of consumption, it will threaten to bankrupt the federal government and most state and local governments as well. This is not a uniquely American problem, by the way. Other countries are experiencing similar growth. In fact, the rate of growth of real per capita healthcare spending in the United States for the past four decades has been right in the middle of the European average. The whole developed world is traveling up a spending path that everyone regards as unsustainable.[1]

One consequence of that is out-of-control federal deficit spending for as far as the eye can see. For much of the last decade, the debate over the need to control entitlement spending has largely focused on Social Security. But if Social Security were our only problem, we could probably muddle through with minor changes. In terms of unfunded liability, however, Medicare is six times the problem of Social Security. And Medicaid is almost as big as Medicare.

In terms of the numbers, the 2009 Social Security Trustees (pre-ACA) report estimated the unfunded liability in Social Security and Medicare at $107 trillion, looking indefinitely into the future.[2] That’s the amount of money we’ve committed to spend over and above the premiums and dedicated taxes these programs are expected to receive, and it’s about six and a half times the size of the entire US economy. Of that amount, Medicare’s unfunded liability is about $89 trillion. If we throw in Medicaid, disability insurance, and other entitlement programs (treating them all as implicit promises to current and future generations), the total unfunded liability is in excess of $200 trillion.[3] Again, the bulk of it is healthcare.

Notes:

1. Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, “US Healthcare Spending in an International Context,” Health Affairs 23 (2004): 10–25, doi: 10.1377/hlthaff.23.3.10.

2. Note, however, that this unfunded liability was officially cut in half by the passage of the Affordable Care Act, which requires enormous cuts in future Medicare spending. Whether these spending cuts will actually take place, however, is highly questionable. See the discussion in Chapter 13 of my book Priceless: Curing the Healthcare Crisis (Oakland, CA: The Independent Institute, 2012).

3. Laurence Kotlikoff, “US Is Bankrupt and We Don’t Even Know It,” BloombergOpinion, August 10, 2010, http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html.

[Cross-posted at Psychology Today]