Health Care Spending: Context and Policy

Publication Date: October 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

The United States spends a large and growing share of national income on health care. In 2006, health spending is expected to approach $2.2 trillion and account for more than 16% of gross domestic product (GDP). We spend substantially more than other developed countries, both per capita and as a share of GDP. However, given our wealth, such spending is not necessarily a problem. On the one hand, depending on our preference for health care compared with other things, we may wish to spend even more. On the other hand, regardless of the preferred level for national spending, our nation might use available resources more efficiently and equitably.

Health care costs put significant pressure on the federal budget -- both directly, through spending on Medicare, Medicaid, and other federal benefits, and indirectly, through tax expenditures for health insurance and expenses. The Congressional Budget Office projects that spending for Medicare, Medicaid, and the State Children's Health Insurance Program will total $559 billion and account for about 21% of federal outlays in 2006. Federal tax expenditures for health benefits; health coverage for military personnel, veterans, and federal employees; and spending by Public Health Service agencies are expected to add $247 billion in costs. Given competing constituent interests and the complex interdependence of public and private benefits and actors, policymakers face difficult challenges in helping to ensure access to health care and health insurance without exacerbating federal budget pressures or contributing to marketwide inflation.

Three broad policy directions have both promise and limitations for addressing health spending: (1) changing health care, (2) changing federal programs, and (3) changing tax policy. The first, changing health care, considers the potential for influencing spending by improving the quality and delivery of health care services. A key limitation of this direction is uncertainty about whether any particular change will reduce or increase health spending.

The second direction, changing federal programs, focuses more narrowly on federal spending for federal benefits. To influence spending, policymakers can set budgets for programs, services, or beneficiaries. They can change eligibility rules or program benefits. And they can change other program features, including payment methods and amounts, and how beneficiaries obtain coverage. In this category, the primary challenge is balancing explicit tradeoffs between competing goals regarding access and spending.

The final direction, changing tax policy, focuses both on making health care more affordable for individuals and families, and on influencing consumers' choices as they purchase health insurance and health care. A key benefit of tax subsidies -- including exclusions, credits, deductions, and tax-advantaged accounts -- relates to flexibility. In general, these tools help consumers buy the health insurance and health care they prefer. A drawback is that tax subsidies may drive up consumer demand and spending on the one hand, while failing to help ensure access to health coverage on the other. This report will be updated.