US Healthcare Spending: Economic Impacts and Reform Strategies

Introduction

Tackling healthcare is one of the most significant economic issues in America today. The Brookings Institute reports that healthcare spending in the United States has doubled as a share of GDP since the 1980s, largely due to changes in insurance plans, provider payment methods, and public sector programs (Boddy et al., 2015). Federal spending on healthcare is increasing rapidly. Demographic shifts bear some of the blame — the baby boomers are a massive generation aging into Medicare territory, a demographic time bomb on the nation's finances, given that seniors are the largest segment of healthcare spenders and that end-of-life care in particular is expensive (CBO, 2017). This paper examines the impacts of healthcare on the economy and seeks to determine whether there is a better pathway to healthcare delivery.

Impacts on the Economy

The exorbitant healthcare expenditure in America, and its consistent growth, is a widely examined and discussed topic. Of late, increasing concerns have been voiced, with both anecdotal evidence and research indicating that the constant swift increase in expenditure poses a threat to the nation's economy. Examining this association is complicated, however. Healthcare expenditure has multifarious and multifaceted influences on the economy, which vary across populations and economic sectors. Analysts observe, for instance, that healthcare expenditure hinders economic development in general but has the potential to promote economic prosperity in particular economic segments as well (Sood, Ghosh & Escarse, 2007).

The Congressional Budget Office (CBO) notes that federal healthcare program spending is increasing rapidly, and with that comes the need to fund that spending. It notes that the Affordable Care Act served to reduce the cost burden of healthcare on the economy — in particular on consumers — but only by slowing the growth in healthcare costs, not reversing it. The CBO studied the potential impacts of ACA repeal and found that repeal would deliver a short-run gain in the federal deficit, but by 2018 would begin a process of sharply increasing the deficit. One reason for this is that many Americans would, instead of maintaining regular medical coverage, become reliant on emergency wards for their primary medical care (CBO, 2015), amid dramatically reduced coverage for tens of millions of Americans.

The main drivers of increased healthcare costs are a rise in chronic illness, such as diabetes and heart disease — diseases suffered by almost half of Americans and very expensive to treat (Amadeo, 2017). The sickest 5% of the population account for 50% of healthcare costs, while the healthiest 50% account for just 3%. Most of the former group are Medicare patients, which is precisely why the federal share of healthcare expenditure continues to rise.

Increased healthcare expenditure — encompassing Medicaid and Medicare spending — regulates the funds available for investment by entrepreneurs and the government in areas such as energy, export product development, infrastructure, and technology capable of facilitating clinical breakthroughs (Folland, Goodman & Stano, 2016). The disparity between overall economic growth (3.6%) and healthcare expenditure growth (9.3%) implies that an increasing percentage of resources is committed to the healthcare sector relative to other goods, with potential effects on both the private and public sectors (Sommers & Gruber, 2017). Municipal, state, and federal governments face expenditure growth at a swifter pace than income growth, thereby intensifying scrutiny on healthcare and related spending. Organizations facing rising healthcare costs may avoid wage increases, cut other spending, demand more cost-sharing from workers, or reduce healthcare insurance benefits. As costs shift more heavily to consumers, healthcare service value will be weighed more closely against other expenditures.

According to some economists, swiftly increasing healthcare expenditure raises inflation while decreasing overall employment and gross domestic product (GDP). Healthcare expenditure affects interest rates, and the comparative impact on industry-wide economic performance is dependent on the funding source for federal healthcare spending. Research using econometric models suggests that deficit funding has a disproportionate adverse impact on the capital goods and export sectors, while payroll tax funding has a disproportionate negative impact on the consumer service sector (Folland et al., 2016).

It should be noted, however, that certain economists consider healthcare expenditure growth to have at least a neutral, if not a positive, economic effect, viewing such growth as a form of economic transfer rather than a net loss.

Government Spending and Citizen Burden

Growing healthcare expenditure contributes greatly to the American government's fiscal position. Public financing in 1960 made up roughly one quarter of overall healthcare expenditure. By 2002, that figure had grown to nearly 46% of overall expenditure. The increase continued, with the federal government covering a substantial and growing percentage — particularly after the Affordable Care Act was enacted (Sommers & Gruber, 2017). This growth is attributed largely to population aging, the ACA's expansion of benefits and eligibility, and rising utilization of public programs.

The citizen burden associated with funding these expenses — in the form of growing taxes and increased long-term borrowing — constitutes the chief effect of this upsurge in governmental health spending. Besides reducing households' and organizations' disposable income, rising taxes create incentives to engage in activities that help avoid their impacts (Sommers & Gruber, 2017). Greater governmental borrowing similarly constrains the resources available for other undertakings. As interest rates rise due to government borrowing, the cost of capital for both families and businesses grows as well, crowding out investment in other activities.

Lastly, greater expenditure on older populations typically leads to growth in intergenerational wealth transfer from younger segments of the population to older ones.