Declining Healthcare Costs: The Good Economic News Keeps Getting Better

January 26, 2024

When Donald Trump ran in 2016, he said that if he got elected, we would get tired of winning. When it comes to the economy, it looks like Trump was right, but only after he was out of office for three years.

It would be hard to find a time in the last half century when the economic picture looked so bright. The economy grew 3.1 percent over the last year, a period for which most forecasters were predicting a recession. Unemployment has been below 4.0 percent for 23 consecutive months, the longest stretch since the late 1960s.

Real wages are now rising at a healthy pace with the largest gains going to those at the bottom of the wage distribution. As a result of the tight labor market, workers’ job satisfaction is at a record high. Productivity growth looks like it may be on a higher path. Inflation looks like it has fallen back to the Fed’s 2.0 percent target. And, thanks to the Inflation Reduction Act, we are finally taking some big steps to slow global warming.

This is all really good news that would likely impress most people if they could find out about it, but there is even more. Healthcare costs have stopped rising as a share of GDP and have even declined some in recent years.

The Golden Age of Deficit Hawks

If that doesn’t sound like a big deal to you, then you didn’t live through the Golden Age of Deficit Hawks. Back in the 1990s and through the next decade, the very serious people of both political parties insisted that the deficit and debt were exploding and that they would bankrupt the country if we didn’t do things like cut Social Security and Medicare very soon.

While it was not generally appreciated at the time, most of their projections for fiscal doom were based on projections for exploding healthcare costs. This projected explosion of health care costs was based on exploding private sector healthcare costs. However, this implied huge budget deficits, since the government pays for close to half of all healthcare through programs like Medicare and Medicaid.

If you want to get a taste for these times, read that deficit hawk classic, Will America Grow Up Before It Grows Old: How the Coming Social Security Crisis Threatens You, Your Family, and Your Country, by private equity billionaire Peter Peterson. For more cheap fun, check out the review in the New York Times by a prominent economist (who promptly apologized and owned up to his mistake.)

The Health Care Cost Explosion Didn’t Happen

The deficit hawks have not gone away, but the healthcare cost explosion, which was the basis for their warnings 30 years ago, never came. Healthcare spending as a share of GDP rose from 11.4 percent in 1990 to 13.6 percent of GDP at the end of 1999.[1] It then rose further to 17.3 percent of GDP by 2010.

Source: National Income and Product Accounts and Author’s Calculations, see note.



However, since 2010 healthcare spending has changed little as a share of GDP. It was just 17.6 percent of GDP in 2023. In fact, spending in recent years has been down somewhat from its pre-pandemic peak of 18.3 percent in 2016.

The year 2010 is notable because that was the year that Obamacare was passed into law. It would be wrong to claim that Obamacare was the sole reason for the slowing of healthcare cost growth. Costs slowed in most other wealthy countries too. But Obamacare almost certainly contributed to the slowing here.

Also, as a political matter, no one can doubt for a second that if costs had gone the other way, that the Democrats would be held fully responsible for rising healthcare costs. That would be the case even if every other wealthy had a larger increase, a story that we just saw with the pandemic inflation.


Lower Healthcare Costs Are Big Money

Seeing fractions of GDP may hide the amount of money involved in these healthcare cost savings. If we were spending 18.3 percent of GDP on healthcare, as we did in 2016, instead of the current 17.6 percent, that would amount to another $196 billion going to healthcare spending this year. That comes to almost $600 a person or $2,400 for a family of four.

The savings are even larger compared to a scenario where health care costs had continued to grow at their pre-2010 pace. Healthcare spending as a share of GDP rose by 5.9 percentage points between 1990 and 2010. If the share had continued to grow at this pace, healthcare spending would have been 21.4 percent of GDP in 2023, 3.8 percentage points above its current level.

Compared to that benchmark we are saving $1,060 billion a year on healthcare costs. That comes to $3,200 a person in annual savings or $12,800 for a family of four. That is big money by almost any standard.


Hey, Where Are My Savings?

People seeing these calculations can reasonably be complaining that they didn’t see any savings on healthcare. And, in fact they didn’t. These are savings measured against projected cost growth. It turns out that the projections were wrong, whether that was due to good policy or bad projections is not easy to say.

In any case, it’s understandable that people wouldn’t get too excited about savings compared to projections that they know nothing about. It is worth saying here that, at the time, these projections were taken very seriously by people in policy debates across the political spectrum.

If someone debating budget policy in 2010 had substituted the actual course of health care cost growth for the next 13 years, that we now know, in place of the projections being used at the time, they would have been laughed off the stage. We can at least say that we are hugely better off than if the experts had been right in 2010 about the future course of healthcare cost growth.

There are two other important points to be made about these healthcare spending numbers. First, most of us don’t directly pay for most of our healthcare. Most of us have insurance, either through our employer or the government.

While what our employer pays for insurance is reflected to some extent in our pay, and government payments show up in overall spending and deficits, we don’t directly see the healthcare costs we incur. This means that if our employer ends up paying five or ten percent less for insurance, we may never directly see these savings, even if some of the savings do eventually show up in our paychecks.

The other point is a bit tricky. At the end of the day, we don’t really care about buying health care services, we care about our health. No one is happy about having more doctors visits or medical tests, they are happy about being in good health. Most people would be very happy if they could have good health with less medical care.

The question that has to be asked in the context of these savings is whether the quality of care and public health has deteriorated since 2010. There is evidence that public health has gotten worse by some important measures, like life expectancy, in the last 13 years. Anne Case and Angus Deaton documented the rise of “deaths of despair” in the deindustrialized Midwest. However, this rise predates Obamacare. The deterioration in health for a substantial segment of the population can’t in any obvious way be attributed to changes put in place by the Affordable Care Act (ACA).

It is common for people to complain about wait times to see doctors and bureaucratic hoops insurers put patients through in order to get tests or see specialists. While these are bad features of our healthcare system, these problems existed long before the passage of the ACA. It’s possible that they have gotten worse, but few people with serious health issues would have been happy about their dealings with insurers in 2010.

Finally, it is worth noting that even with the slower increases in healthcare cost growth since the ACA was passed, we are still paying almost twice as much per person for our healthcare. And, we have little to show for this extra spending in terms of better outcomes. In short, there is still plenty to complain about with our healthcare system.

Nonetheless, we should be happy for the good news – the projected healthcare cost explosion never came. And, with a bit of luck our healthcare costs may actually come down a bit. Some efforts by the Biden administration, such as reducing drug prices and restraining monopoly power for large insurers and other big actors in the industry, may prove helpful in this respect, but we have a very long way to go to get our costs in line with other wealthy countries.  

[1] These numbers are slightly higher than what the Centers for Medicare and Medicare Services (CMS) report for healthcare spending as a share of GDP. They showed a figure of 17.3 percent for 2022 (the last year for which data are available), while my calculations come to 17.5 percent. I assume this is due to some double counting, where I may have some government healthcare spending, which also shows up as consumption. For those wanting to check, I added lines 64, 119, 170, and 273 from NIPA Table 2.4.5U and line 32 from NIPA Table 3.12U. These are therapeutic equipment, pharmaceuticals and other medical products, healthcare services, and net health care insurance. Line 32 is the government spending on Medicaid and other healthcare provision. Although the level is somewhat higher than the CMS data indicate presumably the changes over this period follow the changes as measured by CMS reasonably closely.


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