The United States has experienced a significant increase in health spending over the past few decades, driven by factors such as an aging population, rising rates of chronic conditions, advancements in medicine, and higher prices. While these factors are also present in other large and wealthy nations, the US has relatively high health spending compared to its peers. The US health system is fragmented, with multiple private and public payers, and a mainly fee-for-service payment system. Additionally, the US federal and state governments have generally done less to directly regulate or negotiate prices paid for medical services or prescription drugs, resulting in higher prices for the same brand-name prescription drugs, hospital procedures, and physician care.
Hospital and physician services account for approximately half of total health spending in the US, with hospital spending representing 31.2% of overall health spending in 2023, and physicians/clinics representing 20.1% of total spending. Prescription drugs are also a significant contributor to health spending, with retail prescription drugs experiencing the fastest growth in spending at 8.6% from 2020 to 2023. Private insurance spending has grown much faster than Medicare and Medicaid spending per enrollee, with private insurance often paying higher prices for health care compared to prices paid by Medicare and Medicaid.
The Bureau of Economic Analysis (BEA) has developed a Health Care Satellite Account, which estimates spending and price growth by disease category. This approach shows that the largest categories of medical services spending include the treatment of circulatory diseases, musculoskeletal conditions, and infectious diseases. Health spending is a function of prices and use, and people and health plans in the US often pay higher prices for the same prescription drugs or hospital procedures than people in other large and wealthy nations. The COVID-19 pandemic has led to fluctuations in health care use, with a sharp decrease in health utilization in 2020 followed by an increase in 2021.
The main drivers of health costs in the US are higher prices, rather than higher utilization. In fact, Americans generally have shorter average hospital stays and fewer physician visits per capita compared to other countries. The US health system’s unique features, such as its fragmented and fee-for-service payment system, contribute to its high health spending. To contain health costs, it is essential to understand the components of health spending and identify areas where cost containment efforts could be most effective. This can be achieved by examining trends in health spending by type of service, source of funds, and disease category, as well as analyzing prices and utilization. By addressing the underlying drivers of health costs, the US can work towards reducing its high health spending and improving health outcomes.