U.S. Markets close in 5 hrs 47 mins

America's 'inefficient' health care system is driving our fiscal instability: Powell

Adriana Belmonte
Associate Editor

Health care costs are continuing to grow, and it’s increasingly alarming policymakers.

Federal Reserve Chair Jerome Powell has repeatedly called out health care spending as the primary issue with the ballooning U.S. debt. He did so again while testifying to Congress on Tuesday.

"The U.S. federal government is on an unsustainable fiscal path. ... The thing that drives our single unsustainability is health care spending,” Powell told the Senate Banking Committee. “We spend 17% of GDP, everyone else spends 10%. ... It’s not that benefits themselves are too generous. We deliver them in inefficient ways.”

National health expenditures cost $74.6 billion in 1970 ($378 billion adjusted for inflation). By 2017, that number reached $3.5 trillion. (Graphic: David Foster/Yahoo Finance)

U.S. health care spending grew 3.9% in 2017, reaching $3.5 trillion or $10,739 per person, according to the Centers for Medicaid and Medicare Services (CMS). That accounts for about 17.9% of the nation’s GDP.

"We need to stabilize debt to GDP,” Powell noted.

Compared to 10 other high-income countries (U.K., Canada, Germany, Australia, Japan, Sweden, France, the Netherlands, Switzerland, and Denmark), the U.S. spends nearly twice the amount on health care.

“We spend a lot more [on health care] as a share of our GDP than we need to,” Gary Claxton, vice president of the Kaiser Family Foundation, told Yahoo Finance. “It means that there’s less money around for other goods and services. It’s put a bit of a strain on people to afford health care because it’s pretty expensive.”

U.S. not ‘getting as much value as other countries’

Over the last 40 years, health care spending has increased over 30-fold on a per capita basis, according to the Peterson-Kaiser Health System Tracker. In 1970, it was $355 per person and skyrocketed to $10,739 in 2017. Adjusted for inflation, the increase was nearly 6-fold.

“Generally, the reason why health care costs go up faster than the rest of the economy is that the health care system can produce more stuff over time each year,” Claxton said. “People use more stuff and the price tends to increase.”

Claxton also echoed Powell’s sentiment about inefficiency.

“It would be understandable if our outcomes were a lot better, but they’re not necessarily,” Claxton said. “So it doesn’t seem like we’re getting as much value as other countries are for what we spend on health care. Things have improved in other nations, and they’re not spending nearly as much of their national income as we are.”

Medicare spending as a percentage of GDP is projected to continue increasing by 2044. (Graphic: Barclays)

In 2017, the average person spent $185 on out-of-pocket physician services and $104 on hospital expenses.

“We’ve seen more and more how those prices are going up and how a lot of drugs are unaffordable to patients who really need them,” Lovisa Gustafsson, assistant vice president for The Commonwealth Fund, previously told Yahoo Finance. “But think about the broader issue, that for health care services … prices are extremely higher in the U.S. than in other developed countries.”

‘Nearly half of Americans incur essentially zero costs’

Adding to the pressure, the following Barclays chart citing data from the Congressional Budget Office and the Kaiser Family Foundation shows that the sickest 10% of Americans account for 66% of health care spending.

“Nearly half of Americans incur essentially zero costs in a given year, while an unlucky few have staggering costs,” Josh Bivens, director of research at the Economic Policy Institute, told Yahoo Finance.

The top 1% accounts for 23.5% of all health expenditures. (Graphic: Barclays)

Bivens said that the high-cost population in a given year likely consists of two rough groups: “The chronically sick who will spend a lot of money on health care every single year, and those who experience a one-time health shock.”

The stat about the sickest 10% of Americans making up two-thirds of health care spending has “been true forever,” Claxton said. “If you think about it, health care on average for people under 65 years old is $6,000-7,000 a year. Most of the time, everyone is healthy, but a few people rack up pretty big bills that most folks couldn’t afford to pay for themselves.”

And, Claxton said, the stat “is true in other countries as well. … Most of the time, most people are healthy and some of the times, a few people are pretty sick. And then some people are chronically ill, and they’re in the middle there.”

Adriana is an associate editor for Yahoo Finance. Follow her on Twitter @adrianambells.

READ MORE:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit.