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Why high health care costs hurt the economy

In pushing for health care reform, President Obama has said problems with the current health care system are a big cause of our economic troubles. Just how serious is the problem?
/ Source: The Associated Press

In pushing for health care reform, President Barack Obama has said problems with the current health care system are a big cause of our economic troubles. He's even called the system, with its spiraling costs and inconsistencies in the amount and quality of care people get, a "ticking time bomb" for the federal budget.

Just how serious is the problem? How big a role does health care play in the nation's economy?

Here are some questions and answers about the economic impact of health care.

How big a part of the economy is health care?

It accounts for about one-sixth of the entire economy — more than any other industry.

Spending on health care totals about $2.5 trillion, 17.5 percent of our gross domestic product — a measure of the value of all goods and services produced in the United States. That's up from 13.8 percent of GDP in 2000 and 5.2 percent in 1960, when health spending totaled just $27.5 billion — barely 1 percent of today's level, according to the Kaiser Family Foundation, a nonpartisan health policy group.

What's included in that spending?

It covers money paid to health care providers — hospitals, outpatient centers, Veterans Affairs and other clinics, doctor and dentist practices, physical therapists, nursing homes, home health services and on-site care at places such as schools and work sites.

Also included are retail sales of prescription and nonprescription drugs, premiums paid to health insurers, and revenues of makers of medical devices, surgical equipment and durable medical equipment such as eyeglasses, hearing aids and wheelchairs.

It also counts out-of-pocket payments by consumers for health insurance premiums, deductibles and co-payments, along with costs not covered by insurance and "medical sundries" like heating pads.

Why does Obama say the health care system must be fixed first to repair the economy, and is it true?

It's absolutely correct, for a host of reasons, experts say.

"Health care is the economy," and fixing it would free up money for other priorities, such as education and industrial innovation, said Meredith Rosenthal, a Harvard University professor of health economics and policy.

The health care system is dysfunctional and full of waste — as much as 30 percent of all spending, she said. Unlike most other markets, consumers rarely know which doctors, drugs or treatments are best for them, don't price shop and, if they're insured, don't know the full cost of care. That all can lead to unnecessary spending.

Kaiser's president, Drew Altman, said health care costs have become pocketbook issues for businesses and both insured and uninsured Americans. Kaiser's periodic polls on what consumers worry about find the cost of health care and insurance are equal with job security, gas prices and being able to pay the mortgage.

"People make the link, not just the president," he said, adding that they're most concerned with how reform will affect them personally.

How do health care costs drag on the economy?

Growth in overall health care costs, including spending on the huge Medicare and Medicaid programs, is out of control, said Robert Laszewski, president of consultants Health Policy and Strategy Associates. That limits how much money the federal government and businesses have to invest in solving the energy problem, developing products that can be sold to other countries, creating technology that can bring medical breakthroughs, building infrastructure and more.

How do rising health costs affect workers and businesses?

Health insurance premiums have skyrocketed, making it ever-tougher for workers and employers to afford them. From 1999 through 2008, annual health insurance premiums jumped 119 percent, according to Kaiser data. The average family premium paid by workers rose from $1,543 to $3,354 a year, and employer payments per worker jumped from $4,247 to $9,325.

During that span, worker earnings rose only 34 percent and overall inflation was just 29 percent. So worker income has barely kept pace with inflation, more of the paycheck is going to health costs, and there's less left over for things like vacations, dining out, home improvements or a new car — especially for low-wage workers and retirees. That represents a huge drag on the economic growth, considering that consumer spending powers about 70 percent of the economy.

For employers, particularly small businesses, rising insurance premiums mean there's far less money for new equipment, better facilities, research or expansion. That means fewer new jobs, plus smaller raises and higher health premiums for workers, further limiting consumer spending.

What's the impact of 50 million Americans having no insurance?

Ira S. Loss, senior health care analyst at Washington Analysis, puts it this way: "We're paying to take care of those people."

Hospitals, particularly in inner-city and rural areas, charge patients with insurance more to help make up for those who can't pay their bills. And we're all paying more in taxes to cover extra payments by federal and state governments to hospitals that have large shares of uninsured patients.

Isn't health care one of the few parts of the economy that's growing?


Employment in the huge health care sector has grown by about 427,000 jobs — nearly 3 percent — since the recession began in December 2007, and totaled 15.5 million jobs in April, the latest month for which U.S. Bureau of Labor Statistics figures were available.

Most of the increases came in ambulatory care services (up 254,400 jobs) and hospitals (up 148,400 jobs). That was partly offset by job declines at pharmaceutical companies, drug wholesalers and pharmacies.

However, only 42,900 jobs have been added since January. That's because the steady growth in jobs throughout the recession in ambulatory care, hospitals and, to a lesser extent, health insurers, has slowed dramatically over those months, with hospitals adding only 7,700 jobs and insurers just 1,000.

Obama and Congress are trying to reduce the rate at which health care spending is growing, by eliminating waste and fraud, improving efficiency and increasing preventive care, so it's unlikely jobs at health care providers will decline. In fact, more caregivers will be needed for aging baby boomers, plus the millions who could get coverage under health care reform and presumably would seek care more regularly.

So despite the system's faults, there's an economic silver lining: As Altman of the Kaiser Family Foundation explains, health care has been "one of the few engines of job growth during the recession."