{"id":815,"date":"2013-12-24T10:04:32","date_gmt":"2013-12-23T23:04:32","guid":{"rendered":"http:\/\/blog.panicola.com\/?p=815"},"modified":"2013-12-24T10:04:32","modified_gmt":"2013-12-23T23:04:32","slug":"us-health-spend-to-hit-25-of-gdp-by-2040","status":"publish","type":"post","link":"https:\/\/blog.panicola.com\/?p=815","title":{"rendered":"US health spend to hit 25% of GDP by 2040"},"content":{"rendered":"<ul>\n<li>current growth rate: 4% each 15 years<\/li>\n<li>20% by 2020<\/li>\n<li>28% by 2050<\/li>\n<\/ul>\n<p><a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed\">http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed<\/a><\/p>\n<header id=\"main-content-header\">\n<h1 id=\"page-title\">U.S. Health Spending as a Share of GDP &#8211; Where Are We Headed?<\/h1>\n<\/header>\n<div id=\"content\">\n<div id=\"block-system-main\">\n<div id=\"blog-post-page\">\n<div>\n<div>\n<div><\/div>\n<div>\n<div>\n<div>\n<div>\n<div>\n<div>Tuesday, July 16, 2013<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<div>\n<div>\n<div>\n<div>\n<div>\n<div><a href=\"http:\/\/altarum.org\/staff\/charles-roehrig\">Charles Roehrig<\/a><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<div>\n<div>\n<div>\n<div>\n<div>\n<div>\n<p><em>This blog was inspired by a\u00a0<\/em><a href=\"http:\/\/altarum.org\/health-policy-blog\/a-slower-rate-of-health-cost-growth-what-happens-when-an-irresistible-force-meets-an-increasingly\"><em>post<\/em><\/a><em>\u00a0and follow-up\u00a0<a href=\"http:\/\/council.brandeis.edu\/pdfs\/2013\/steuerle_Health%20and%20Income%20Growth%20--%20Brandeis-RWJ4.pdf\">data<\/a>\u00a0from\u00a0<\/em><a href=\"http:\/\/altarum.org\/staff\/gene-steuerle\">Gene Steuerle<\/a><em>, and informed by discussions with\u00a0<\/em><a href=\"http:\/\/altarum.org\/staff\/tom-getzen\">Tom Getzen<\/a><em>.\u00a0 The three of us will be elaborating on this general topic at our Robert Wood Johnson Foundation-funded\u00a0<\/em><a href=\"http:\/\/altarum.org\/research-centers\/center-for-sustainable-health-spending\/meetings-videos-highlights-and-reports\"><em>sustainable health spending symposium<\/em><\/a><em>\u00a0on July 30th\u00a0in Washington DC. \u00a0Hope to see you there!<\/em><\/p>\n<p>The\u00a0<a href=\"http:\/\/altarum.org\/sites\/default\/files\/uploaded-publication-files\/Blog_Health-Spending-History_110211.pdf\">historical growth in health spending<\/a>\u00a0as a share of GDP is well-documented and increasingly well-known, having increased from about 6 percent in 1965 to 18 percent in 2012.\u00a0 We know this share will eventually level off \u2013\u00a0<em>but where<\/em>?\u00a0 I begin by reviewing the historical trend.<\/p>\n<p>As shown in the first chart, the historical trend since 1965 is roughly on a linear path, increasing by 4 percentage points each 15 years (see, for example, 1975 to 1990 and 1990 to 2005). \u00a0At this rate, the share would reach 20 percent in 2020, 28 percent in 2050, and 40 percent by 2095.\u00a0 And yes, health spending would reach 100 percent of GDP in about 310 years!\u00a0 OK \u2013 we obviously don\u2019t believe this trend will continue for the next 300 years but the chart provides no clue about a leveling-off.\u00a0 What macro variable might we examine for clues as to the longer term path of this line and its possible leveling-off point?<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" title=\"National health expenditure share of GDP\" alt=\"Graph of national health expenditure share of GDP\" src=\"http:\/\/altarum.org\/sites\/default\/files\/uploaded-blog-post-images\/NHE-share-of-GPD_0.jpg\" width=\"480\" height=\"350\" \/><\/p>\n<p>The Health Spending Share of the Growth in GDP<\/p>\n<p>Gene Steuerle has long been a proponent of looking at the per capita\u00a0<em>growth<\/em>\u00a0in health spending as a share of the per capita\u00a0<em>growth<\/em>\u00a0in GDP (a marginal approach).\u00a0 His\u00a0<a href=\"http:\/\/altarum.org\/health-policy-blog\/a-slower-rate-of-health-cost-growth-what-happens-when-an-irresistible-force-meets-an-increasingly\">blog<\/a>presents a variety of historical statistics including the chart below.\u00a0 The health share of GDP growth rose during the first three decades beginning in 1960, dropped during the managed care decade of the 1990s, and jumped dramatically during the most recent decade.\u00a0 Between 2000 and 2010, health spending accounted for a whopping 43 percent of total and 87 percent of per capita GDP growth!<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" title=\"Health spending as a share of total and per capita GDP growth\" alt=\"Graph of health spending as a share of total and per capita GDP growth\" src=\"http:\/\/altarum.org\/sites\/default\/files\/uploaded-blog-post-images\/steuerle.jpg\" width=\"480\" height=\"350\" \/><\/p>\n<p><em>Reprinted with permission from Gene Steuerle\u2019s May 2013 blog.<\/em><\/p>\n<p>It is difficult to discern any long-term pattern in these shares, particularly with the sharp jump from 2000 to 2010.\u00a0 As Gene notes, this jump is influenced by the recession which affected GDP growth much more than health spending growth.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn1\">[i]<\/a>\u00a0 Perhaps we could learn more about the long-term pattern if we eliminated the noise introduced by business cycles, especially the 2007-2009 recession.<\/p>\n<p>Removing the Effects of Business Cycles<\/p>\n<p>The next chart plots the health spending share of real per capita GDP growth for various time periods between 1965 and 2011, after removing the effects of business cycles (the Appendix Chart presents annual data).<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn2\">[ii]<\/a>\u00a0 I refer to the health spending share of real per capita GDP growth as the \u201cmarginal\u201d share.\u00a0 The chart shows that this marginal share increased steadily between 1965 and 1990, from 13 percent for 1965-70 to 29 percent for 1985-90.\u00a0 The 1990-2005 period encompasses the managed care era of very slow health spending growth (roughly 1994-2000), and three years of backlash featuring very high spending growth.\u00a0 Over the total 15-year period, the marginal share is 27 percent.\u00a0 From 2005 through 2011, the marginal share is 31 percent.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" title=\"Health spending share of GDP growth\" alt=\"Graph of health spending share of GDP growth\" src=\"http:\/\/altarum.org\/sites\/default\/files\/uploaded-blog-post-images\/Health-spending-share-of-GDP-growth.jpg\" width=\"480\" height=\"296\" \/><\/p>\n<p><em>Source:\u00a0 Altarum Center for Sustainable Health Spending<\/em><\/p>\n<p>Once business cycle effects have been removed, and managed care and its backlash are averaged together, we see a\u00a0<em>very<\/em>\u00a0interesting pattern.\u00a0 The marginal share grows steadily between 1965 and 1990 and then levels off at about 30 percent (a mathematical asymptote).\u00a0\u00a0<em>While this may not represent the equivalent of Plank\u2019s constant, it is astounding to find a key macro-level health spending statistic that has been relatively stable for over 20 years! \u00a0<\/em>Obviously, there is no guarantee that it will persist long-term, but it is certainly mathematically possible.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn3\">[iii]<\/a>\u00a0 It seems unlikely to decrease in the next couple of decades, given our rapidly aging population.\u00a0 But it also seems unlikely to increase, given the unrelenting pressures to control spending.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn4\">[iv]<\/a>\u00a0 Thus, 30 percent appears to be a reasonable baseline assumption for longer-term forecasts of health spending growth around which alternative assumptions could be investigated.<\/p>\n<p>What If the 30 Percent Marginal Share Persists?<\/p>\n<p>Let us assume that health spending continues to consume 30 percent of the growth in real per capita GDP.\u00a0 Intuition should tell you that, over time, this will cause the health spending share of GDP to grow from its current 18 percent toward 30 percent.\u00a0 The faster is the growth in real per capita GDP, the faster the growth in the health spending share of GDP toward its upper limit of 30 percent.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn5\">[v]<\/a><\/p>\n<p>The next chart reproduces the historical health spending share of GDP and its linear trend line through 2012 (shown above), and then projects forward to the year 2100 under three alternative growth rates in real per capita GDP.\u00a0 The projections confirm that greater economic growth accelerates the growth in the health spending share of GDP.\u00a0 The middle rate of 1.5 percent is similar to what the Congressional Budget Office (CBO) projected for the latter half of their 10-year forecast.\u00a0 If this rate persists, the health spending share of GDP would reach 20 percent in 2025 and 25 percent in 2070.\u00a0 At the 2 percent growth rate, these milestones would be met sooner (2022 and 2056); while at 1 percent growth they would be met later (2031 and 2100).\u00a0 The projections illustrate how the roughly linear historical trend eventually begins to bend downward toward a long-run upper limit of 30 percent.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" title=\"Projected health spending share of GDP growth at 30%\" alt=\"Graph of projected health spending share of GDP growth at 30%\" src=\"http:\/\/altarum.org\/sites\/default\/files\/uploaded-blog-post-images\/projected-health-spending-share-of-GDP.jpg\" width=\"480\" height=\"410\" \/><\/p>\n<p><em>Source:\u00a0 Altarum Center for Sustainable Health Spending<\/em><\/p>\n<p>Income Elasticity and Excess Growth<\/p>\n<p>The \u201cincome elasticity\u201d of health spending and rate of \u201cexcess growth\u201d in health spending are statistics of great interest to health economists.\u00a0 The income elasticity refers to the percent increase in real per capita health spending associated with a one percent increase in real per capita GDP, and excess spending refers to health spending growth minus GDP growth.\u00a0 Here are the formulas (via\u00a0<a href=\"http:\/\/council.brandeis.edu\/pdfs\/2013\/steuerle_Health%20and%20Income%20Growth%20--%20Brandeis-RWJ4.pdf\">Steuerle<\/a>) linking these concepts to the marginal share:<\/p>\n<ol>\n<li>Income Elasticity = marginal share \/ cumulative share<\/li>\n<li>Excess Growth = (Income Elasticity \u2013 1) * GDP growth rate (real per capita)<\/li>\n<\/ol>\n<p>Under our assumption of a constant 30 percent marginal share,\u00a0<em>the income elasticity declines steadily over time<\/em>\u00a0due to growth in the cumulative share.\u00a0 Consider the 1.5 percent growth projection line from the chart above.\u00a0 In 2013 the cumulative share is 18 percent so the elasticity is 1.7 and excess growth is 1 percent, i.e., we are at GDP+1.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn6\">[vi]<\/a>\u00a0 By 2025 the elasticity has fallen to 1.6 and excess growth to 0.8 percent and by 2050 these figures are 1.3 and 0.5 percent respectively.\u00a0 In the long run, the elasticity approaches 1.0 and excess growth approaches 0.0.<\/p>\n<p>As shown in formula (2), excess growth depends upon both the income elasticity\u00a0<em>and<\/em>economic growth.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn7\">[vii]<\/a>\u00a0 Over the past 25 years of a stable marginal share and growing cumulative share, the income elasticity has declined, and this explains part of the decline in excess growth observed over that period.\u00a0 The underlying trend in real per capita GDP growth began dropping in about 2004, resulting in additional reductions to excess growth in recent years and contributing to the pre-recession slowdown.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn8\">[viii]<\/a><\/p>\n<p>Sustainability<\/p>\n<p>Given the focus of the Center for Sustainable Health Spending, I should address the sustainability of a constant 30 percent marginal share.\u00a0 It is certainly sustainable in the sense that it could, mathematically, go on forever.\u00a0 But the more interesting question is whether it is sustainable in terms of federal government financing requirements.<a href=\"http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed#_edn9\">[ix]<\/a>\u00a0\u00a0<a href=\"http:\/\/altarum.org\/health-policy-blog\/a-new-look-at-the-simpson-bowles-budget-plan-implications-for-sustainable-health-spending\">In previous work<\/a>, we have used 2035 as a target year for a balanced federal budget.\u00a0 Between now and 2035, if the marginal share remains at 30 percent and real per capita GDP growth averages 1.5 percent, excess growth will slow from 1.0 percent to 0.6 percent, averaging about 0.8 percent.\u00a0 According to our\u00a0<a href=\"http:\/\/www.youtube.com\/watch?v=QrPaJBh01sE\"><em>Triangle of Painful Choices<\/em><\/a>, tax revenues would have to increase to more than 22 percent of GDP for a balanced budget even if defense and other non-health federal spending (other than social security) were kept to historically low shares of GDP.<\/p>\n<p>If you have managed to follow all of this, you might be thinking we should hope for slower growth in GDP in order to reduce excess growth in health spending.\u00a0 Of course this turns out to be something we should\u00a0<em>not<\/em>\u00a0hope for \u2013 but there\u2019s no space to address that here.\u00a0 Come to our\u00a0<a href=\"http:\/\/altarum.org\/health-policy-blog\/a-slower-rate-of-health-cost-growth-what-happens-when-an-irresistible-force-meets-an-increasingly\">symposium<\/a>\u00a0where we can delve more deeply into this and other related issues!<\/p>\n<p>APPENDIX CHART<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" title=\"Health spending, real per capita without business cycles\" alt=\"Graph of health spending, real per capita without business cycles\" src=\"http:\/\/altarum.org\/sites\/default\/files\/uploaded-blog-post-images\/Annual-health-spending-share-of-GDP-growth_0.jpg\" width=\"480\" height=\"226\" \/><\/p>\n<p><em>Source:\u00a0 Altarum Center for Sustainable Health Spending<\/em><\/p>\n<div>\n<hr \/>\n<div>\n<p><a id=\"_edn1\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref1\" name=\"_edn1\">[i]<\/a>\u00a0Gene finds a much more stable pattern in recent years by averaging over longer periods, thereby diluting the business cycle effects (see the last chart in his blog).<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn2\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref2\" name=\"_edn2\">[ii]<\/a>\u00a0I eliminated business cycle effects from GDP using\u00a0<a href=\"http:\/\/altarum.org\/health-policy-blog\/the-case-for-tracking-health-spending-as-a-share-of-potential-gdp\">\u201cpotential\u201d GDP<\/a>, and from health spending using a variant of the model described\u00a0<a href=\"http:\/\/kff.org\/health-costs\/issue-brief\/assessing-the-effects-of-the-economy-on-the-recent-slowdown-in-health-spending-2\/\">here<\/a>.\u00a0 More specifically, to purge GDP of business cycles, I began with real potential GDP (PGDP) estimates from the February 2013 Congressional Budget Office (CBO) report.\u00a0 This represents CBO\u2019s estimate of what real GDP would have been each year if the nation was at full employment.\u00a0 Even this series has some significant business cycle-related noise so I used an 11 year centered moving average to provide further smoothing.\u00a0 For health spending, I regressed real per capita health spending on smoothed real per capita PGDP along with a set of business cycle variables (current year and five lagged years) representing the difference between GDP growth and smoothed PGDP growth.\u00a0 I used this model to estimate, for each year, the impact of business cycles on real per capita health spending growth.\u00a0 I then created a health spending series in which these business cycle effects were eliminated.\u00a0 Details are available upon request.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn3\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref3\" name=\"_edn3\">[iii]<\/a>\u00a0This mathematical possibility contrasts with the commonly-used statistic \u2013 growth in excess of GDP \u2013 which cannot remain positive forever.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn4\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref4\" name=\"_edn4\">[iv]<\/a>\u00a0Expanded coverage under the Affordable Care Act will almost certainly drive the marginal share well above 30 percent during the years of implementation.\u00a0 But this is a very short-term effect with a minimal impact on the longer-term trend.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn5\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref5\" name=\"_edn5\">[v]<\/a>\u00a0The overall share is a mixture of the historical share (18 percent now) and the accumulated future share (30%), with the weights depending upon the cumulative increase in real per capita GDP.\u00a0 Note that if there was no growth in real per capita GDP, the health spending share of GDP would remain constant.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn6\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref6\" name=\"_edn6\">[vi]<\/a>\u00a0The elasticity is .30\/.18 = 1.7.\u00a0 Excess growth is (1.7 \u2013 1)*1.5 percent = 1 percent.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn7\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref7\" name=\"_edn7\">[vii]<\/a>\u00a0We ignore the short-term effects of business cycles; think of real per capita GDP growing along its long term path in this analysis.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn8\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref8\" name=\"_edn8\">[viii]<\/a>\u00a0The trend in smoothed real per capita potential GDP averaged 1.9 percent from 1985 through 2004 and 1.3 percent from 2005 through 2011.<\/p>\n<\/div>\n<div>\n<p><a id=\"_edn9\" title=\"\" href=\"http:\/\/www.altarum.org\/forum\/post\/us-health-spending-share-gdp-where-are-we-headed#_ednref9\" name=\"_edn9\">[ix]<\/a>\u00a0This is the definition of sustainability that our Center has developed.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>current growth rate: 4% each 15 years 20% by 2020 28% by 2050 http:\/\/altarum.org\/health-policy-blog\/u-s-health-spending-as-a-share-of-gdp-where-are-we-headed U.S. Health Spending as a Share of GDP &#8211; Where Are We Headed? Tuesday, July 16, 2013 Charles Roehrig This blog was inspired by a\u00a0post\u00a0and follow-up\u00a0data\u00a0from\u00a0Gene Steuerle, and informed by discussions with\u00a0Tom Getzen.\u00a0 The three of us will be elaborating on &hellip; <a href=\"https:\/\/blog.panicola.com\/?p=815\" class=\"more-link\">Continue reading <span class=\"screen-reader-text\">US health spend to hit 25% of GDP by 2040<\/span> <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[26,9,22],"tags":[],"class_list":["post-815","post","type-post","status-publish","format-standard","hentry","category-facts-data-points","category-healthcare","category-policy"],"_links":{"self":[{"href":"https:\/\/blog.panicola.com\/index.php?rest_route=\/wp\/v2\/posts\/815","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.panicola.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.panicola.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.panicola.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.panicola.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=815"}],"version-history":[{"count":1,"href":"https:\/\/blog.panicola.com\/index.php?rest_route=\/wp\/v2\/posts\/815\/revisions"}],"predecessor-version":[{"id":816,"href":"https:\/\/blog.panicola.com\/index.php?rest_route=\/wp\/v2\/posts\/815\/revisions\/816"}],"wp:attachment":[{"href":"https:\/\/blog.panicola.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=815"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.panicola.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=815"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.panicola.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=815"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}