After much anticipation regarding health care reform, 1994 ended
without passage of any national legislation. The debate will probably
resurface in the new Congress, since the issues and concerns surrounding
the U.S. health care system still exist. However, it is unlikely
that the discussion will be framed with the same sense of urgency
as in 1994. Furthermore, results of last November's elections
suggest a considerably reduced probability that health care reform
will entail a total overhaul of the system. Nevertheless, some
action can be expected at the national and state levels on issues
such as pre-existing conditions and the accessibility of health
insurance. Although some form of universal coverage may continue
to be viewed as a goal, the time span for its achievement will
likely be lengthened.
Despite the absence of major health legislation at the national
level, the delivery and financing of U.S. health care have undergone,
and will continue to undergo, modifications. Similar to the pattern
of recent years, much of the change will continue to be initiated
at the state level. While quality of care remains a major element
of the debate, cost has been the major driving force behind many
of the changes.
The desire to control sharply rising costs appears to have steered
the U.S. health care system in the direction of managed care.
Recent trends suggest that enrollment in health maintenance organizations
(HMOs) for 1994 is close to 50 million, with market penetration
approaching 20% . Although surveys differ as to the estimated
level of enrollment, they are consistent in pointing to significant
growth in recent years. Existing and prospective competition have
precipitated a consolidation within the various industries that
encompass the health care system. Barring any dramatic shift in
course, these market forces are expected to intensify during the
remainder of the 1990s.
National Health Expenditures
Many of the cost issues and other concerns over health care in
this country led to a focus on the level and growth of national
health expenditures. The latest estimates from the Health Care
Financing Administration (HCFA) put 1993 health care expenditures
at $884.2 billion, representing an increase of 7.8% over spending
in 1992 . This was the slowest growth rate recorded by national
health expenditures since 1986. As shown in the Figure 1,
total health care spending is projected to exceed $1 trillion
in 1995. The annual growth rate for the 1990 to 1995 period is
expected to average 8%, compared to 9.9% for the previous 5 years.
According to Health Care Financing Administration data, spending
on personal health care totaled $782.5 billion in 1993, an increase
of 7.2% over the prior year. Table 1 shows a breakdown by type
of expenditure and source of payment. Hospital care and physicians'
services combined accounted for more than three-fifths of personal
health expenditures. In the past, the relatively low out-of-pocket
share for these categories has been singled out as a main cause
for the sharp increase in expenditures. Although this share remains
low for both categories, especially hospital care, each showed
relatively slow growth in 1993. Among the various categories,
home health care continues to display the fastest growth, by far,
while "other professional services" continues to record
Although the growth rate for health care spending has slowed in
recent years, it remains above that of the overall economy. National
health expenditures were equivalent to 13.9% of Gross Domestic
Product (GDP) in 1993. Current estimates for 1995 put the ratio
of national health expenditures to GDP at 14.3%. Just 5 years
prior, spending on health care represented 12.6% of the goods
and services produced in the United States, with the ratio 10
years ago at 10.8% .
The rising share of resources being channeled into US health care,
as evidenced by this ratio, remains one of the focal points of
the ongoing debate in the United States. The extent of the health
care claim on resources is even more apparent when viewed in a
context of marginal analysis, ie, looking at incremental changes
. The $70 billion increase in national health expenditures
projected for 1995 represents 18% of the expected dollar increase
in Gross Domestic Product. Thus, despite a discernible slowing
in spending on health care, still almost one-fifth of new economic
resources in 1995 will be devoted to this category of spending.
International comparisons have also played a central role in the
questions regarding resource utilization and health care in the
United States. The latest data from the Organization for Economic
Cooperation and Development (OECD)  show US health care spending
at a significantly above-average percentage of gross domestic
product. In addition to the current relatively high share of gross
domestic product, the data show that during the 1985 to 1992 period,
the United States exhibited a larger increase in the share compared
to other major industrial countries. Interestingly, Canada, whose
single-payer system has been touted as a possible model for the
United States, came in second in terms of both relative share
and growth since 1985.
Medical Care Inflation
Clearly, one of the most notable developments regarding health
care costs has been the dramatic slowing in medical care inflation
as measured in the Consumer Price Index (CPI), which measures
price changes for a specific "market basket" of consumer
goods and services. The difference in importance among various
items between the medical care CPI and health insurance plans
explains, in large part, why cost experiences have shown gains
substantially greater than the medical Consumer Price Index. Other
factors include technology advances, higher utilization, and the
rise in catastrophic cases.
Although disagreement over some of the technical aspects of the
Consumer Price Index persist, the deceleration in the medical
care component of the CPI has been too significant to be dismissed.
As indicated in Table 2, the increase for 1994 is estimated at
just 4.8%-the smallest increase since 1973. This result followed
a gain of 5.9% in 1993, and was substantially below our forecast
of a year ago .
Much of the difference from the projection was reflected in a
sharp slowing among hospital and related services. The categories
in this grouping, ie, rooms, inpatient services, and outpatient
services, are displaying their slowest price increases since the
mid-1980s-a period when prospective payment and diagnostic related
groups were adopted into Medicare. Physicians' services also contributed
to the lower-than-expected rise in the medical care component
of the Consumer Price Index for 1994.
While some of the slowing in the medical care CPI can be attributed
to a lower level of general inflation, a significant narrowing
of the gap between the two suggests the presence of factors specific
to medical care. Projections for 1995 show the gap narrowing further,
despite a slight increase in medical care inflation.
Although the health care issue is viewed nationally, many of the
developments regarding health care are transpiring at the regional
level. State health expenditure data prepared by the Health Care
Financing Administration reveal significant regional variations
. According to the data supplied by the HCFA in 1993, New England
has the highest spending relative to the country as a whole, with
the Rocky Mountain states at the other end of the scale. The fastest
growth for the period was recorded in the southeast, at 10.3%
annually, followed by New England and the mid-eastern states.
The far west, at 8.2%, exhibited the slowest growth. Not surprisingly,
the high-cost, high-growth regions were the same as those with
an above-average proportion of the population aged 65 and older.
The Plains states were an exception. Although showing the largest
proportion of older residents, their spending and growth were
The factors that differentiate health care from other parts of
the economy have been widely discussed: consumers do not pay directly
for a large proportion of expenditures; suppliers are intricately
involved in the demand decisions; technology advancements increase
demand and, in many instances, do not improve productivity.
Despite these attributes, health care is not immune to market
forces and the laws of economics. Although much of the industry
remains on a nonprofit basis, cost pressures are significantly
influencing behavior. Mergers and acquisitions have become commonplace,
as firms jockey for position in the new environment.
Summary and Conclusions
The cry for health care reform has diminished somewhat. Nevertheless,
more changes are forthcoming. For the foreseeable future, health
care will demand a rising share of resources. Earlier estimates
put the proportion of health expenditures to Gross Domestic Product
at almost 17% by the year 2000.
Although there is no magic number regarding this proportion, its
relative level in the United States strongly suggests that changes
need to take place. It would appear that the population prefers
that changes be instituted through the private sector, and not
through extensive government involvement and regulation.
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Statistical Bulletin 74(1):29-35, 1993.
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Statistical Bulletin 75(1):30-35, 1994.
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