Health Expenditures in 2004

Health Expenditures in 2005
Updated September 26, 2007
Paulette C. Morgan
Analyst in Social Legislation
Domestic Social Policy Division



Health Expenditures in 2005
Summary
In 2005, the most recent year for which data are available, just under $2 trillion
was spent on health care and health-related activities. This amount represents a 6.9%
increase over 2004 spending. The majority of health spending (84%) went towards
paying for health care goods and services provided directly to individuals. These
goods and services are referred to as personal health care. The remaining 16% of
health spending covered research, public health activities, administrative costs,
structures, and equipment.
Personal health care expenditures grew 7.1% in 2005, continuing a downward
trend in the growth of expenditures that peaked in recent times in 2001 at 8.7%.
From the beginning of 1992 to the end of 2000, personal health expenditures grew
at an average annual rate of 5.8%, historically low levels not seen since 1960.
Compared with spending increases over the past 40 years, the 7.1% increase that
occurred in 2005 is relatively moderate. In particular, the years 1979 through 1981
experienced growth rates between 13.8% and 15.9%.
Relative to the overall economy, personal health expenditures increased in 2005.
In 2005, personal health expenditures accounted for 13.3% of gross domestic product
(GDP), up from 13.2% of GDP in 2004 and 2003, 12.8% of GDP in 2002, and 12.2%
in 2001. For the nine years prior to 2001, health spending as a percentage of GDP
was relatively constant. From 1992 to 2000, personal health expenditures, as a
percentage of GDP, stayed between 11.5% and 11.7%. During the three decades
prior to the 1990s, personal health expenditures, as a percentage of GDP, increased
almost every year.
Home health care spending was the fastest growing category of personal health
care in 2005. Home health care spending in 2005 was 11.1% higher than the amount
spent in 2004. Yet, because home health care represents about 3% of personal health
expenditures, it was one of the smallest contributors to overall growth in personal
health spending. Hospital care, which grew 7.9% in 2005 and accounts for more than
one-third of personal health expenditures, contributed the most to overall growth in
personal health spending. Spending on physician and clinical services, which grew
at 7.0% in 2005 and accounts for one-fourth of personal health expenditures, was the
second largest contributor to overall growth in personal health spending.
Over 85% of personal health expenditures in 2005 were financed by third-party
payers. The largest payer, private health insurance, financed 36% of all personal
health expenditures. The second-largest payer, the federal government, accounted
for 34% of all personal health spending. Certain categories of health care are funded
primarily by third-party payers, whereas other categories are financed almost entirely
out-of-pocket. The federal government is the largest payer of hospital care and
nursing home and home health care. Private health insurance is the largest payer of
dental services and prescription drugs. Out-of-pocket expenditures are the largest
source of funding for non-durable medical goods (which include over-the-counter
drugs) and durable medical goods (which include eyeglasses).



Contents
Real Growth in Personal Health Expenditures...........................3
Health Spending and Gross Domestic Product...........................4
Growth in Categories of Medical Care.................................4
Financing Health Care..............................................7
Appendix .......................................................10
List of Figures
Figure 1. Growth in Nominal Personal Health Expenditures................2
Figure 2. Factors Influencing Growth in Nominal Personal Health
Expenditures .................................................3
Figure 3. Personal Health Care Spending as a Percent of Gross Domestic
Product (GDP)................................................4
Figure 4. Contribution of Various Types of Medical Care to Total Personal
Health Care Growth, 2005 (amount in billions)......................5
Figure 5. Share of Personal health Expenditures Devoted to Major
Categories of Medical Care, 1960-2005............................6
Figure 6. Source of Funding for Personal Health Expenditures,
1960-2005 ...................................................7
Figure 7. Source of Funding for Major Categories of Personal
Health Care Expenditures, 2005..................................8
List of Tables
Table 1. 2005 Health Expenditures....................................1
Table 2. Sources of Funding for Major Categories of Personal Health
Care Expenditures, 2005........................................9
Table 3. Factors Influencing Growth in Nominal Personal Health
Expenditures ................................................10



Health Expenditures in 2005
In 2005, the most recent year for which data are available, approximately $2.0
trillion was spent on health care and health-related activities. This amount represents
a 6.9% increase over 2004 spending. The majority of health spending (84%) went
towards paying for health care goods and services provided directly to individuals.
These goods and services are referred to as personal health care. The remaining
amount covered administrative expenses, public health activities, health research,
construction of health facilities and offices and medical capital equipment.1 Table
1 indicates how much was spent on various categories of health care goods and
services in 2005 and how much these amounts increased over 2004 levels.
Table 1. 2005 Health Expenditures
Increase Percent
over 2004increase
Amountspendingover 2004
Type of Expenditure($ billions)($ billions)spending
Personal health care expenditures:
Hospital care$611.6$44.77.9%
Physician and clinical services$421.2$27.57.0%
Long-term care:
Nursing home care$121.9$6.86.0%
Home health care$47.5$4.711.1%
Prescription drugs$200.7$11.15.8%
Dental services$86.6$5.26.3%
Other professional services$56.7$4.17.8%
Non-durable medical goods (excluding
prescription drugs)$34.1$1.34.1%
Durable medical goods$24.0$0.83.7%
Other personal health care$57.2$3.97.3%
Total personal health care expenditures$1,661.4$110.17.1%
Government administration and net cost of
private health insurance$143.0$7.85.7%
Government public health activities$56.6$4.17.7%
Research $40.0 $1.8 4 .6%
Structures and Equipment$86.8$5.16.3%
Total national health expenditures$1,987.7$128.86.9%
Source: Prepared by the Congressional Research Service (CRS) based on data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.


1 Research excludes amounts spent by pharmaceutical companies and medical equipment
suppliers.

This report focuses on expenditures for personal health care, since these goods
and services constitute most spending on health-related activities. The latter half of
the 1990s experienced historically low growth in personal health care spending.
From the beginning of 1994 to the end of 1999, health spending increased at an
average annual rate of 5.6%. This low growth is attributable to changes in both the
private and public sectors. In the private sector, the increased use of managed care
limited cost growth during the mid-1990s. Vigorous fraud-and-abuse investigation
and the Balanced Budget Act of 1997 (which slowed growth in hospital, home health,
and nursing home payments) constrained health expenditures in the late 1990s.2 The
effect of these changes in public and private sector have subsided; in 2000, personal
health expenditures grew at 6.7%, 1.1 percentage points higher than the average rate
over the previous six years. Personal health expenditures grew at even higher rates
in 2001 (8.7%) but have fallen steadily since then. Looking from a broader historical
perspective, spending growth in recent years is still much lower than that in most
years since 1960 (see Figure 1). In particular, the years 1979 through 1981
experienced growth rates between 13.8% and 15.9%.
Figure 1. Growth in Nominal Personal Health Expenditures


18%


16%


14%


12%


10%


8%


6%


4%


2%


0%


1960 1965 1970 1975 1980 198 5 1990 1995 2000 2005
Source: Congressional Research Service (CRS) calculations using data from the Centers for Medicare
and Medicaid Services, Office of the Actuary.
2 Levit, Katharine, Cynthia Smith, Cathy Cowan, Helen Lazenby, and Anne Martin,
“Inflation Spurs Spending in 2000,” Health Affairs, vol. 21, no. 1, January/February 2002.

Real Growth in Personal Health Expenditures
Figure 1 depicts growth in nominal personal health expenditures.3 Three
factors contribute to growth in nominal health spending: higher population, higher
prices, and higher real per capita expenditures, which some experts label the
“intensity” of care. Real per capita expenditures indicate qualitative and quantitative
increases in the amount of care received by individuals. Figure 2 depicts the role of
population, prices, and real per capita expenditures in nominal health expenditure
growth. Caution should be used when interpreting data on real health expenditures,
however. Real expenditures are estimated using price indexes for medical care goods4
and services, but such price indexes are imperfect. As a result of these
imperfections, it is difficult to isolate prices and real per capita health expenditures
from nominal health spending.
Figure 2. Factors Influencing Growth in Nominal Personal Health
Expenditures


18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Increase in Medical Care Prices
Increase in Real Personal Health Care Spending (Per Capita)
Increase in Population
Increase in Nominal Personal Health Expenditures
Source: Congressional Research Service calculations using data from the U.S. Census Bureau and
the Centers for Medicare and Medicaid Services, Office of the Actuary.
Note: To make component factors additive, percentages in this figure represent continuous growth
rates rather than discrete annual changes. A supporting table for this figure is provided in the
append ix.
3 Nominal describes expenditures which are not adjusted for inflation.
4 For more information, see Berndt, Ernst R., et al., “Price Indexes for Medical Care Goods
and Services: An Overview of Measurement Issues,” in David M. Cutler and Ernst R.
Berndt, eds., Medical Care Output and Productivity (Chicago: The University of Chicago
Press, 2001).

Health Spending and Gross Domestic Product
Spending on personal health care in 2005 increased relative to the overall
economy. In 2005, personal health care expenditures accounted for 13.3% of gross
domestic product (GDP), up from 13.2% of GDP in 2003 and 2004, 12.8% of GDP
in 2002 and 12.2% of GDP in 2001. These increases mark a departure from the
experience of the previous nine years, when health spending as a percent of GDP was
relatively constant. Between 1992 and 2000, personal health care expenditures
averaged 11.6% of GDP (see Figure 3).
Figure 3. Personal Health Care Spending as a Percent of Gross
Domestic Product (GDP)


16%


14%


12%


10%


8%


6%


4%


2%


0%


1960 1965 1970 1975 1980 198 5 1990 1995 2000 2005
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.
Growth in Categories of Medical Care
Four categories of medical goods and services compose more than 84% of
personal health care expenditures: hospital care, physician and clinical services,
prescription drugs, and long-term care (which includes nursing home and home
health care). In 2005, home health care was the fastest growing category of health
expenditures, increasing 11.1% above 2004 expenditures (see Table 1).

However, growth rates of individual categories of services can be deceptive at
indicating how much a particular category of medical care contributed to overall
spending growth. As indicated in Table 1, the category with the largest dollar
increase was hospital care. In 2005, spending on hospital care was $44.7 billion5
higher than in 2004, an increase of 7.9%. Home health care expenditures were $4.7
billion higher in 2005 than they were in 2004, an increase of 11.1%. Thus, even
though home health care increased more than hospital care in terms of percentage
growth, hospital care grew more than home health care in dollar terms. That is,
growth in hospital care contributed most to increased personal health care
expenditures in 2005. The $44.7 billion increase in hospital expenditures in 2005
accounted for 41% of the $110.1 billion increase in overall personal health care
spending. Figure 4 shows how much dollar growth in each category of personal
health care contributed to total growth in personal health expenditures.
Figure 4. Contribution of Various Types of Medical Care to Total
Personal Health Care Growth, 2005 (amount in billions)


Total Increase in Personal Health Care Spending = $110.1 Billion
T
Hospital Care
$44 . 7
Physician and
Clinical Services
$ 27. 5
Ot h e r
$1 0. 2
Dental ServicesNursing Home and
$5. 2
Prescription DrugsHome Health Care
$ 11. 5 $1 1. 1
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.
5 That hospital care can exhibit large dollar growth, yet moderate percentage growth, is
attributable to the fact that hospital care constitutes a relatively large share of total personal
health expenditures.

Figure 5. Share of Personal health Expenditures Devoted to Major
Categories of Medical Care, 1960-2005


47%50%
44%45%
41%
39%40%
37%

35%


30%


25%26 %
23% 22% 22%25%

20%


12 %15%
10% 11% 10%11% 9%
7% 6% 7%10%
4%5%

0%


1 960 1970 1980 1990 2005
Hospital CarePhysician and Clinical Services
Nursing Home and Home Health CarePrescription Drugs
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.
Much attention has been directed at spending on prescription drugs. The share
of personal health expenditures devoted to prescription drugs has more than doubled
since 1981, when drugs accounted for only 5.4% of personal health expenditures.
Yet, 1981 represented the trough of a 20-year decline in spending on prescription
drugs, as a share of personal health expenditures. While the percent of personal
health expenditures spent on prescription drugs has grown significantly over the past
two decades, prescription drug spending represented only a slightly greater share of
personal health expenditures in 2005 as it did in 1960. This trend is illustrated in
Figure 5.6
Long-term care, which includes nursing home and home health care, composes
a larger share of health care than in the past. In 1960, about 4% of personal health
care expenditures were spent on nursing home and home health care. In 2005, about
10% of personal health spending was directed towards providing nursing home and
home health care.
6 It is worth noting that data on prescription drug spending include only those drugs received
in non-institutional establishments. Spending on drugs dispensed in nursing homes or
hospitals is considered spending on those respective categories. Consequently, data on
prescription drug expenditures are likely to be understated.

Financing Health Care
In 2005, 85% of personal health expenditures were in the form of third-party
payments. Private health insurance was the largest payer of personal health care in
2005; it paid 36% of personal health expenditures. The federal government, the
second largest payer, accounted for 34% of all personal health spending. The health
care system underwent a shift over the last four decades from one financed primarily
by out-of-pocket expenditures to one financed primarily by private insurance. Figure

6 shows how the funding of personal health care has changed from 1960 to 2005.


Ultimately, all health care is funded by individuals through out-of-pocket
expenditures (including insurance deductibles and co-payments), insurance
premiums, taxes, and charitable contributions.7
Figure 6. Source of Funding for Personal Health Expenditures,

1960-2005


11%State and Local
13%Fu nds
34%Federal Funds
9%
4%Other Private Funds
2%
36%Private Health
21%Insurance
15%Ou t - of- P ocket
55 %Payments
19602005
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.
7 Even when an individual’s employer contributes part of the insurance premium, economic
theory suggests that the individual accepts a lower wage in exchange for this benefit. Thus,
individuals pay for all insurance premiums, either directly or in the form of forgone wages.

Although private insurance and the federal government are the largest payers of
overall personal health expenditures, their role in financing health care varies by type
of medical care. Figure 7 illustrates how major categories of health care were
funded in 2005 (detailed numbers for Figure 7 are provided in Table 2). The two
largest categories of personal health care, hospital care and physician services, were
financed primarily by private insurance and the federal government. A small share
of these services were paid out-of-pocket. Conversely, almost all expenditures on
non-durable medical goods (which includes mostly over-the-counter drugs) were paid
out-of-pocket, although this category represents only a small share of all personal
health care expenditures. Private insurance plays a relatively small role in financing
nursing home and home health care. These services were funded mostly by the
federal government and out-of-pocket expenditures. Dental services and prescription
drugs are funded mostly by private insurance and out-of-pocket expenditures; the
federal government plays a relatively small role in the financing of these services.
State and local funds account for a small share of expenditures in all categories. The
contribution of theses funds is largest in nursing home and home health care, and in
hospital care.
Figure 7. Source of Funding for Major Categories of Personal Health
Care Expenditures, 2005


40 %
35 %
30 %
25 %
20 %
15 %
10 %
5%
0%
Ho s pital Phys i c ia n Nurs ing Pr e s c r i pt io n De nt a l No n- Dura bl e Dura bl e Ot he r
Careand ClinicalHome andDrugsServicesMedicalMedical
ServicesHome HealthGoodsGoods
Ca r e
Out-of-Pocket PaymentsPrivate Health InsuranceFederal FundsState and Local Funds
Source: The Congressional Research Service (CRS) calculations using data from the Centers for
Medicare and Medicaid Services, Office of the Actuary.

Table 2. Sources of Funding for Major Categories of Personal
Health Care Expenditures, 2005
(amounts in billions)
Source of funding
Private Other
Out-of-healthFederalState andprivate
Category of health carePocketinsurancefundslocal fundsfundsTotal
Hospital care$20.1$217.0$279.4$67.7$27.4$611.6
Physician and clinical$42.5$203.3$121.8$26.7$26.8$421.2
services
Prescription drugs$50.9$95.2$32.9$21.7$0.0$200.7
Nursing home and home$37.4$14.9$78.5$32.9$5.6$163.3
health care
Dental services$38.3$43.1$3.1$2.1$0.1$86.6
Non-durable medical$32.0$0.0$2.1$0.0$0.0$34.1
goods
Durable medical goods$13.7$2.9$7.0$0.4$0.0$24.0
Other $14.5 $20.2 $43.9 $26.8 $8.5 $113.9
To tal $249.4 $596.7 $568.5 $178.4 $68.4 $1,661.4
Source: Centers for Medicare and Medicaid Services, Office of the Actuary.
Note: Numbers may not add up to total due to rounding.



Appendix
Table 3. Factors Influencing Growth in
Nominal Personal Health Expenditures
Total increaseTotal increase
Increase inin nominalin nominal
real perpersonalpersonal
capitahealth carehealth care
Increase inpersonalexpendituresexpenditures
Increase inmedicalhealth care(continuous(yearly
Yearpopulationcare pricesexpendituresgrowth rates)growth rates)
1966 1.0% 4.9% 4.1% 10.1% 10.6%
1967 1.0% 4.8% 6.7% 12.5% 13.3%
1968 1.0% 5.6% 5.7% 12.3% 13.1%
1969 1.0% 5.8% 5.3% 12.1% 12.8%
1970 1.0% 6.2% 5.6% 12.7% 13.5%
1971 1.4% 6.0% 2.1% 9.5% 10.0%
1972 0.9% 3.9% 5.7% 10.5% 11.0%
1973 0.9% 3.8% 6.3% 11.0% 11.6%
1974 0.5% 8.8% 4.4% 13.6% 14.6%
1975 0.9% 10.2% 2.4% 13.6% 14.5%
1976 0.9% 8.5% 3.9% 13.2% 14.1%
1977 0.9% 7.6% 3.9% 12.3% 13.1%
1978 0.9% 7.6% 3.1% 11.6% 12.3%
1979 0.9% 8.7% 3.4% 13.0% 13.8%
1980 0.9% 10.8% 3.1% 14.7% 15.9%
1981 1.3% 11.5% 1.9% 14.7% 15.9%
1982 0.9%10.2% 0.4%11.4%12.0%
1983 0.8% 7.2% 1.7% 9.8% 10.3%
1984 0.8% 7.3% 1.1% 9.2% 9.6%
1985 1.2% 7.0% 1.4% 9.7% 10.2%
1986 0.8% 4.8% 2.7% 8.4% 8.7%
1987 0.8% 4.7% 3.4% 9.0% 9.4%
1988 0.8% 6.0% 3.8% 10.6% 11.2%
1989 1.2% 6.6% 2.1% 9.9% 10.5%
1990 1.2% 6.5% 3.5% 11.1% 11.7%
1991 1.2% 5.5% 3.0% 9.7% 10.2%
1992 1.2% 5.1% 1.9% 8.1% 8.5%
1993 1.1% 4.5% 0.7% 6.4% 6.6%
1994 1.1% 3.7% 0.3% 5.1% 5.3%
1995 1.1% 3.5% 1.2% 5.9% 6.1%
1996 0.7% 2.9% 1.6% 5.3% 5.4%
1997 1.1% 2.1% 2.1% 5.3% 5.4%
1998 1.1% 2.1% 1.9% 5.1% 5.3%
1999 1.1% 2.7% 1.8% 5.6% 5.7%
2000 1.1% 3.3% 2.2% 6.5% 6.7%
2001 0.7% 3.8% 3.9% 8.3% 8.7%
2002 1.0% 3.8% 3.1% 7.9% 8.3%
2003 1.0% 3.6% 2.9% 7.5% 7.8%
2004 1.0% 4.0% 2.0% 7.0% 7.3%
2005 1.0% 3.5% 2.4% 6.9% 7.1%
Source: The Congressional Research Service (CRS) calculations using data from the U.S. Census
Bureau and the Centers for Medicare and Medicaid Services, Office of the Actuary.
Note: Totals may not equal the sum of the parts due to rounding. Continuous growth rates can be
converted to discrete yearly changes using the formula: [(annual change)=exp(continuous rate)-1].