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The Upward Arc from an Unknown Expenditure to 18% of US GDP for Health

December 11, 2013

By Jeremiah Norris

The upward thrust of events that have shaped healthcare in America since 1900 when national health expenditures were unknown to 18% of GDP in 2013 constitutes a study often lost in the mist of time, and one that is illustrative of the long road to the Affordable Care Act of 2010 (ACA). The 18% is seen as expenditure within a seamless, integrated ‘system’, rather than the amorphous components which comprise a public-private cottage industry.  At the advent of the 20th Century, population was 76m with a life expectancy of 47 years. Health insurance wasn’t available, nor published reports on health expenditures until the mid 1950s.  Now, we have 317m with a life expectancy of 78.2 years, and 84% is covered by health insurance.

The beginnings of organized medicine weren’t in place until the Flexner Report of 1910, funded by Carnegie Foundation. The Report served as the catalyst for establishing a standard curriculum in medical schools, their accreditation, and the licensing and certification of practitioners.  Up until that point, there were proprietary medical schools, mainly operated as private businesses. Approximately one-third of them closed in the decade following publication of this Report. From 1910 – 1928, the Rockefeller Foundation funded a momentum for change through the reorganization of medical education within twenty-four universities.

Since then, the major drivers on the upward expenditure curve have been government initiatives. During the Great Depression of the 1930s, patients had difficulty paying hospitals for services. The government stepped in, offered community hospitals non-profit status in return for a fixed percentage of their income over expenses to cover uncompensated care. This was the birth of Blue Cross-Blue Shield Association.

In the late 1950s, the government established wage and price controls in private businesses. It then permitted employers to substitute health insurance as a covered benefit in lieu of wage increases.

In 1965, the Congress passed Medicare, which provided healthcare for those aged 65+. In 1972, legislation authorized the End Stage Renal Disease Program under Medicare. It now covers 90% of all US citizens with severe chronic kidney disease, regardless of age. In 1997, the Congress added a new component, the Program of All-Inclusive Care for the Elderly. It provides comprehensive care for individuals age 55 and older who are sufficiently frail to be categorized as “nursing home eligible” by their state’s Medicaid program. Disability insurance was added in the 1970s for those under age 65, some as infants. In 2006, the Prescription Drug Benefits Program was added.

In 1966, the Congress enacted Medicaid, a program for the provision of health services to the poor. States provide up to one half of the funding. Those with disabilities who do not have a work record and receive Supplemental Security Income (SSI), are enrolled into Medicaid as a mechanism to provide them with health insurance.   Medicaid payments currently assist nearly 60% of all nursing home residents and about 37% of all childbirths in the US. The federal government pays on average 57% of Medicaid expenses.

In 1997, the Children’s Health Insurance Program (CHIP) was enacted by the Congress as a partnership between federal and state governments. It is administered by HHS and provides matching funds to states for health insurance to families with incomes that are modest but too high to qualify for Medicaid.

In 1960, Congress enacted the Federal Employees Health Benefit Program (FEHB). The government contributes 72% of the premium of all plans offered to active and retired federal employees. FEHB is administered by the US Office of Personnel Management.

The Military Health System is under the US Department of Defense, while the Veterans Administration is a separate Cabinet post. They provide healthcare to active duty, retired military personnel, dependents, and veterans from all service branches.

The Indian Health Services was established in 1955, and is operated through HHS. In 2011, its budget was $4.3 billion, covering 2,700 nurses, 900 physicians, 400 engineers, 500 pharmacists and 300 dentists. Other health professionals bring total staffing to more than 15,000. Indians are also eligible to apply for health care provided by Medicaid.

For the period 2013-2022, these health spending differences per enrollee can be seen in 2013 and 2022:

  • Medicare spending per enrollee                             $11,829               $16,914
  • Medicaid spending per enrollee                             $7,784                 $10,777
  • CHIP                                                                             $2,187                 $3,115
  •  Employer-sponsored Private Health Ins.            $5,435                 $8,204
  •  Other Private Health Insurance                             $2,434                 $5,587

A central premise of ACA is that it will bend the cost curve downward on national health expenditures. Excepting Medicaid, the other programs mentioned will be outside of ACA’s specific domain, though they cover some 100m people. For those enrolled into Medicaid, the Federal government will pay States its full costs for the first three years, and 95% thereafter. There will be no deductibles.   This will accelerate the present differential between government and private spending, assuring that the HHS’s actuary prediction of health expenditures rising to 20% of GDP by 2022 will be realized.

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