Definition
Health care cost growth refers to the sustained tendency of US health expenditure to increase faster than gross domestic product (GDP), general price inflation, and wages. Between 1999 and 2009, US health spending nearly doubled from $1.3 trillion to $2.5 trillion, rising from 13.8% to 17.6% of GDP and from $4,600 to $8,000 per capita. For a median-income family of four with employer-sponsored insurance, this growth consumed virtually all real income gains over the decade, leaving only $95/month in additional non-health purchasing power — or −$295/month after full deficit adjustment (Auerbach and Kellermann 2011).
Key Ideas
- The four-channel decomposition. A family's total health cost burden includes (1) employee premium contributions (visible), (2) employer premium contributions passed through as depressed wages (hidden), (3) out-of-pocket spending — copays, deductibles, over-the-counter (OTC) (visible), and (4) taxes devoted to public health programs — Medicare, Medicaid, military health, Veterans Affairs (VA), Indian Health Service (IHS) (hidden). Standard cash-income surveys capture only channels 1 and 3.
- Employer pass-through. Economists broadly agree that employer health insurance premium contributions reduce employee wages approximately dollar-for-dollar (net of payroll tax effects). Rising employer premiums therefore function as a hidden wage tax: they appear as compensation increases in employer accounts but as foregone income to workers.
- Deficit obfuscation. Medicare and Medicaid are financed through general taxation. When the federal government runs large deficits — as in 2009, when it collected ≈$0.60 per dollar spent — the true cost of public health programs to current taxpayers is understated. Taxes in 2009 were insufficient to cover federal health spending by a margin equivalent to ≈$390/month for the typical family.
- International benchmarks. The GDP+1% growth rate — the Affordable Care Act (ACA)'s target for Medicare spending — was achieved in the US from 1990 to 1999 (managed care expansion, Balanced Budget Act of 1997) and sustained by Switzerland, Germany, and several other Organisation for Economic Co-operation and Development (OECD) countries 1999–2009. The US actual rate for 1999–2009 was approximately GDP+3%.
- Value question. Additional spending bought modest marginal health gains: US adult life expectancy (LE) grew ≈1 year 1999–2009 vs. 2.2 years OECD average; amenable mortality fell only 5% vs. 10–25% in peer countries; magnetic resonance imaging (MRI) utilization grew 84% and computed tomography (CT) more than doubled 1999–2007 despite scant evidence of benefit from expanded imaging.
How It Works
| Channel |
1999 |
2009 |
Change |
Visibility |
| Employee premium (after-tax) |
$85/mo |
$195/mo |
+129% |
Visible |
| Employer premium (after-tax) |
$240/mo |
$550/mo |
+129% |
Hidden |
| Out-of-pocket |
$135/mo |
$235/mo |
+74% |
Visible |
| Taxes for health programs |
$345/mo |
$440/mo |
+28% |
Hidden |
| Total |
$805 |
$1,420 |
+77% |
— |
Of the $1,910/month nominal income gain 1999–2009: $820 (43%) went to health care, $125 to non-health taxes, $870 to non-health price inflation, leaving $95 net. Even the $95 overstates real purchasing power because deficit spending deferred ≈$390/month of federal health costs.
Why It Matters
- Wage stagnation: A substantial share of apparent real wage stagnation for middle-income US workers reflects rising health costs absorbing compensation increases. Workers bear employer premium contributions through lower wages, but this channel is invisible in standard income statistics.
- Retirement income adequacy: Rising premiums and out-of-pocket costs reduce savings over a career. Workers who retire at 62 and claim Social Security early face continuing health cost exposure before Medicare eligibility at 65. See Social Security Claiming Age and Early Retirement Safety Net Gap.
- Employment structure: Health absorbed the employment shock from manufacturing decline — the US added 3.6 million health jobs while losing 4.1 million manufacturing jobs 1998–2008. This structural shift shapes geographic income divergence and Occupational Polarization.
- Fiscal sustainability: Congressional Budget Office (CBO) projected (2007) health spending reaching half of US GDP by 2082 if trends continued. The ACA (2010) targeted GDP+1% growth for Medicare but the cap is not binding.
Open Questions
- Did the ACA bend the cost curve? Post-2010 health spending growth did slow, but disentangling policy from the Great Recession and sequestration is difficult.
- Does the employer pass-through assumption hold at all income levels? Evidence suggests it may not hold near the minimum wage (Gruber 2001).
- What is the distributional incidence of health cost growth? Auerbach and Kellermann's family is ≈70th income percentile; lower-income uninsured families face different cost structures with no employer contribution but full out-of-pocket exposure.
- How does health cost growth interact with Employment Lock? As employer-sponsored insurance grows more valuable relative to Medicare, the incentive to remain employed through age 65 increases — reinforcing the employment lock mechanism (Singleton 2024).
Related
Sources