$3.5 Trillion: Where it Comes From and Where it Goes

You don’t need to be an economist to understand that in the time it takes to finish this sentence $4 million will be spent on healthcare.  On average, this is the amount of money that will trade hands as you read each and every sentence.

Where does this money come from? Well, mainly from you and people like you.

Today the annual price tag for the American healthcare system is $3.5 trillion.[i]  This is what $3.5 trillion looks like:

$3,500,000,000,000

That’s an average of $10,739 per citizen per year to provide some, but not all, Americans with access to health services.

To put this number in perspective, about eight trillion dollars a year is spent on healthcare worldwide.[ii] This is roughly ten percent of the world’s Gross Domestic Product (GDP). By comparison, healthcare in America currently consumes 17.9% of its GDP and climbing.

No other industrialized country has similar healthcare costs. We spend two-and-a-half times more than other developed nations.

By any standard these are big numbers. Perhaps if the United States had the healthiest citizens with the best longevity our investment in healthcare would represent a bargain.  But, as noted in other posts, we put more in but get less out compared to other nations.

Imagine putting more money into your 401k retirement plan than your neighbors only to learn they were much better off with a larger nest egg because they invested in things that provided a higher return. The challenge for reforming healthcare is not much different.

While the dialogue around healthcare is complex, the goal of reform is simple: Where should we make investments in keeping with a set of goals that provide the best returns we seek to achieve with the health system?  As you consider this question, let’s start by looking at where all money for the health system comes from and where it goes. 

Where money comes from

To start, it’s important to understand that the majority of resources for health come directly from government-run health and medical programs funded through taxes paid by employers, employees and retirees.

The government also influences how private funds from employers and citizens are collected and spent through a complex series of laws, regulations and tax incentives. These include things like coverage mandates, payroll taxes and medical savings accounts.

Explaining the intricacies of how the healthcare finance system works would fill volumes of books. For now, we’ll keep things simple by using a view from government accounting known as “Type of Sponsor”.  Type of Sponsor is the entity that is ultimately responsible for financing the health care bill, such as private businesses, households, and governments.  These sponsors pay health insurance premiums and out-of-pocket costs, or finance health care through dedicated taxes and/or general revenues.[iii]

In using this approach, we see that the federal government accounts for the largest share of health spending at 29%, followed by households at 28%, private businesses at 20 % and finally state and local governments at 17%.

Today, almost half of all funds used in healthcare (45%)  come from government sources including the federal government which funds programs such as Medicare (healthcare for seniors) as well as state and local governments which contribute funds to support programs such as Medicaid (healthcare for low income).

The second largest category is “households” which is really all of the “out-of-pocket” expenses consumers like you spend on everything from healthcare co-pays to the costs of over-the-counter and other items purchased to manage health and medical conditions.

Where the money goes

Now that we have a sense of where money comes from to fuel today’s the health system, let’s shed some light on where we all this money goes. Here is how $3.5 trillion is spent:

A quick glance at where the money goes shows that more than half of all funds go to support hospitals and physicians. Almost a quarter of all funds are used to support the cost of administering health systems and programs.  This leaves roughly one quarter of all funds for everything else such as home health, school and workplace health, dental and other clinical disciplines such as chiropractic and physical therapy.

Within these numbers are other issues to be understood and addressed. As an example, the Institute of Medicine reports that up to one third of all expenditures, about $750 billion, is spent on unnecessary administrative services, inefficiencies and care that doesn’t actually improve health.[iv]

For most of us, it’s easy to get lost in these numbers. To better understand what’s going on, and formulate our own views on how we spend on healthcare, let’s look at four trends driving how money is spent which start to shed light on why we have some of the performance issues we’ve already noted. 

It’s Sickcare not Healthcare

While we euphemistically talk about the reform of “healthcare”, the numbers above show that that the majority of the systems and expenditures today are heavily weighted towards treating people once they become ill or injured. While this may seem like stating the obvious, it’s a fundamental issue when it comes to the debate around spending more than any other country only to have our comparative measures be lower than other countries spending less.  

When you “follow-the-money” you see that today’s health care system is mainly a disease-management system. It’s rooted in financial incentives for treating medical problems once they occur as opposed to helping people maintain or regain their health.

This brings us to a fundamental question critical to the health reform debate: What is the purpose and goal of our health system?

Should it focus on treating illness and injury once these occur or should it be geared towards prevention and health maintenance?

To put this into perspective, in 2015, thirty two percent of all funds spent went to hospitals while two tenths of one percent of all funds went towards things like maternal/child health services and school health programs.[v]

The simple answer is that the system should do both. The deeper question to ponder is what the balance should look like in terms of priorities, expenditures and desired outcomes.


For Consideration:

  • What is you view on the balance of where funds come from and how they are allocated or spent?
  • If you could change things, how would you balance investments in treating people who are ill or injured versus investing in prevention and wellness measures?

Resources:

Americans Remain Dissatisfied With Healthcare Costs is a report by Gallup on the results of a recent poll showing that most Americans consider healthcare costs and access to be a major issue. Provides a breakdown of the issues along with useful charts to explain details surrounding the issues.

The National Health Expenditure Accounts (NHEA) are the official estimates of total health care spending in the United States. Dating back to 1960, the NHEA measures annual U.S. expenditures for health care goods and services, public health activities, government administration, the net cost of health insurance, and investment related to health care. This is one of the best starting point sites for researching or understanding health expenditures in the United States.

Download this brief from CMS which highlights National Health Expenditures for the most recent year data is available. A concise resource that serves as a great handout or reference guide to understanding health expenditures.

Explore and compare Global Health Expenditures through this site sponsored and managed by the World Health Organization. Includes data updated to 2018 and reflects health financing reforms taking place in Member States, between 2000-2016.


References:

[i]https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html

[ii] World Health Organization. Global Health Expenditure Database (GHED) [

[iv] http://www.nationalacademies.org/hmd/Reports/2012/Best-Care-at-Lower-Cost-The-Path-to-Continuously-Learning-Health-Care-in-America/Infographic.aspx

[v] National Health Expenditures by type of service and source of funds, CY 1960-2015. CMS.   https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/NHE2015.zip

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