Medical supplies, equipment account for biggest spike in healthcare spending

The fact that the U.S. spends $3 trillion a year on healthcare is well publicized, but where those dollars actually end up is often obscured. Researchers seeking to shed light on this issue published their findings in the July edition of Health Affairs.

Using data from the U.S. Census Bureau and the Bureau of Labor Statistics, the researchers, from the Wagner Graduate School of Public Service at New York University, examined revenues and expenses from 1997 to 2012 across three sectors in healthcare: physicians’ offices, hospitals and outpatient care centers. They found that in those 15 years, overall revenues rose by $580 billion and employment grew by 1.7 million.

When scrutinizing those numbers further, they discovered that although the share of compensation to nurses and doctors increased, the overall proportion of revenues that went to labor compensation declined, from 53.2% to 49.8% from 1997 to 2012. The bulk of spending increases was instead due to services and goods such as drugs and devices.

These findings land amid a long-running debate within the healthcare sector and the U.S. at large about how to rein in healthcare spending by lowering costs while improving quality, without becoming overly fixated on potentially arbitrary benchmarks.

“There is no magic share of the economy (to) devote to health,” Michael Chernew, a professor of healthcare policy at Harvard Medical School in Boston who did not participate in the study, said in an email. “It should just be about value,” he added.

In 2014, the U.S. spent $3 trillion—17.5% of its GDP—on healthcare. That amounts to $9,523 per person. The CMS found that the largest proportions were spent on hospital care (32%), physician and clinical services (20%) and prescription drugs (10%).

Because the approach laid out in the Health Affairs article analyzed health spending differently, it offered other insights.

In 1997, the three sectors that the researchers examined spent 28.3% of their revenues on intermediate costs for goods and services. In 2012, that proportion rose to 35.7%, growth that from 2002 to 2012 was driven primarily by expenses for purchased materials, and medical supplies in particular in the latter half of that decade, the researchers found.

Today, about 1 in 8 jobs in the U.S. can be found in the healthcare sector, whose pace of job creation—24.5% from 1997 to 2012—vastly outstripped the 11.3% seen by the economy overall during that same period. Meanwhile, those entering the healthcare workforce are poised to continue doing so in droves.

Nineteen years ago, one out of roughly every 18 people working in physicians’ offices, hospitals and ambulatory centers was a physician. Four years ago, it was one in 16.6 people. Employment in nursing has grown 33.2% from 1997 to 2012.

Others, like lab technicians and therapists, have experienced even more rapid job growth—nearly 50% from 1997 to 2012—but not nearly the same increase in wages. As a result, despite such rapid job growth, the proportion of revenues spent compensating these healthcare providers barely changed in recent decades.

“What matters is what activities are best at improving health,” Chernew said. However the healthcare sector employs people, having them perform “high-value activities” was crucial, he added. “I think the key is to focus on spending on things that promote value, and design a system that can be managed efficiently.”

New delivery systems and new technologies are likely to alter where the money is being funneled. Policies such as the Balanced Budget Act, which aimed to reduce hospital surpluses, would likely need to be implemented to adjust to the trends, the study’s authors concluded.