Health Care Costs and Affordability

Over the last several decades, health spending has been driven higher by a number of factors, including but not limited to an aging population, rising rates of chronic conditions, advancements in medicine and new technologies, higher prices, and expansions of health insurance coverage. While there are always differences across countries, many of these factors driving health costs upward in the U.S. are also driving health costs growth in peer nations. For example, while the U.S. population is indeed aging and that is driving health costs up, many large and wealthy nations have even more rapidly aging populations.

Other factors may explain the United States’ relatively high health spending compared to its peers. The U.S. health system is fragmented, with many private and public payers, and the regulation of these payers is split between states and the federal government. However, these features are not unique to the U.S., either. Indeed, some other countries with much lower health spending have multiple private payers or differences in public programs across states or provinces. The U.S. is also not alone in having a mainly fee-for-service payment system.

The U.S. health insurance system is largely voluntary, whereas peer countries’ health systems are almost entirely compulsory. Additionally, the U.S. federal and state governments have generally done less to directly regulate or negotiate prices paid for medical services or prescription drugs than have governments of similarly large and wealthy nations. The U.S. often pays higher prices for the same brand-name prescription drugs, hospital procedures, and physician care than similarly large and wealthy countries.

There are other factors, largely outside the control of the health system, that also are likely at play, such as socioeconomic conditions (like income inequality and other social determinants of health), and differences in so-called lifestyle factors (like diet, drug use, or physical activity) that could contribute both to higher spending and worse outcomes.

Breaking total national health spending into its components can reveal the major drivers of health costs and where cost containment efforts could be most effective. The charts below show various ways of examining the key contributors of health spending. For example, the National Health Expenditure Accounts show trends in how health spending varies by type of service (e.g. hospital care vs. retail prescription drugs) or by source of funds (e.g. private health plans vs. public programs). An alternative and relatively new approach to understanding health spending is to break out total health spending into the share that goes to treat certain diseases (e.g. heart disease, cancer). Finally, health spending can also be better understood by looking at price trends (e.g. the dollar amount for a hospital stay) and utilization (e.g. the number of hospital stays).  

Hospital and Physician Services Represent Half of Total Health Spending

Most health spending in the U.S. and peer countries is on hospital and physician care, followed by prescription drugs. In the U.S., hospital spending represented nearly a third (30.4%) of overall health spending in 2022, and physicians/clinics represented 19.8% of total spending. In comparison to other large and wealthy countries, the U.S.’s higher spending on inpatient and outpatient care explains the vast majority of higher spending on health care overall.

Spending Has Grown for Hospitals, Physicians, and Drugs

During the 1970s, growth in hospital expenditures outpaced other services, while prescriptions and physicians/clinics saw faster spending growth during the 1980s and 1990s. From 2020 to 2022, retail prescription drugs experienced the fastest growth in spending at 7.6%, following 3.3% average annual growth from 2010 to 2020. Average spending growth for hospitals and physicians/clinics between 2020 and 2022 was 3.4% and 4.0%, respectively.

On a Per-Enrollee Basis, Private Insurance Spending Has Typically Grown Much Faster Than Medicare and Medicaid Spending

Per-enrollee spending by private insurance grew by 61.6% from 2008 to 2022 – much faster than both Medicare and Medicaid spending growth per enrollee (40.8% and 21.7%, respectively). Generally speaking, private insurance pays higher prices for health care than Medicare and Medicaid.

Per-enrollee spending for Medicaid rose by 2.2% in 2022 from the previous year and also continued to increase in private insurance and Medicare (4.3% and 3.8% respectively). Medicare and private insurance per enrollee spending continued to grow faster in 2021 and 2022 after slower growth in 2020. Medicaid per-enrollee spending previously declined in 2021 as total enrollment grew, particularly among children and non-elderly adults, who generally have lower per-enrollee spending.

A Substantial Share of Health Spending Goes Toward the Treatment of Circulatory and Musculoskeletal Conditions

An alternative way to examine the components of health spending is to use the Bureau of Economic Analysis (BEA)’s Health Care Satellite Account, which estimates spending and price growth by disease category (e.g. cancer, infectious disease). This approach differs from the official categorization of health spending by service type (e.g. provider services). Essentially, the new satellite account redefines the “commodity” in health care as the treatment for specific diseases rather than a hospital stay or a physician visit. BEA researchers found that the largest categories of medical services spending include the treatment of circulatory diseases (10.4% of health spending in 2021), musculoskeletal conditions (9.4%) and infectious diseases (9.0%). Another large share of health spending (15.1%) is for “ill-defined conditions,” which can include routine check-ups and follow-up care that is not easily designated for a particular illness.

Health Spending is a Function of Prices and Use

Health services spending is generally a function of prices (e.g. the dollar amount charged for a hospital stay) and utilization (e.g. the number of hospital stays).

People and health plans in the U.S. often pay higher prices for the same prescription drugs or hospital procedures than those in other large and wealthy nations. Meanwhile, there is not much evidence that people in the U.S. use more health care. In fact, Americans generally have shorter average hospital stays and fewer physician visits per capita. Therefore, a large part of the difference in health spending between the U.S. and its peers can be explained by higher prices, more so than higher utilization.

Nonetheless, over time within the U.S., prices and utilization have driven health cost growth to varying degrees. In the 1980s and early 1990s, growth in health care prices far exceeded growth in use. Faster growth in health prices in the U.S. during this time drove the divergence in per capita health spending between the U.S. and other large, wealthy OECD countries. While U.S. health care prices have grown more moderately in recent decades, health services prices continue to exceed what other countries pay.

More recently, the COVID-19 pandemic has led to fluctuations in health care use. Early in the pandemic, many health services, such as elective surgeries, were postponed or canceled and many people elected not to get care to avoid infections at health care sites. In 2021, health services use increased by 8.6%. This increase in health care use in 2021 followed a sharp decrease in health utilization in 2020. Health care prices increased moderately in 2021 by 2.9%. A rebound in utilization and labor pressures are expected to put upward pressure on prices in recent years.