Perspectives on Health Care Spending Growth

The evolution of health care spending has important implications for many aspects of our economy. As highlighted by this conference, the trajectory of health spending growth is a central determinant of the outlook for federal and state budgets and for workers’ take-home pay. Health spending also affects other key economic variables, including measured productivity and prices. Further, the coming demographic change has important implications for both the level and financing of health spending. For these reasons, the question of what drives health spending growth is a subject that has received much attention from researchers and policymakers, although, as I hope to show in this background paper, much remains to be learned.

The basic questions driving all this attention are simple: Why has the share of health spending in GDP been rising for decades? And when and how will this trend stop? Recently, there has been much debate about the slowdown in health spending growth observed over the past few years. Analysts have been trying to determine whether this slowdown is simply the result of the recent recession, or whether it reflects something new. In this paper, I first step back from the question of the recent slowdown and attempt to provide some background on the key determinants of health spending growth and how these have evolved over time. I then address the recent slowdown.