David Cutler: What is the health spending problem?

What Is The U.S. Health Spending Problem?

By David M. Cutler
Health Affairs, Published Ahead of Print February 14, 2018


Is increased spending on medical care harmful to the US economy? The overall share of the gross domestic product spent on medical care is not a problem, provided that the services bought are worth more than their cost. However, high and rising costs expose two often-overlooked problems. First, spending is too high because many dollars are wasted. Estimates suggest that unnecessary medical spending costs the typical American family thousands of dollars each year. Second, high medical costs combined with stagnant incomes for a large share of the population and the inability of governments at all levels to raise tax dollars leads to increased health and economic disparities: fewer people covered by private insurance, the rationing of care in public health programs, and the lack of funds for other social programs. These distribution issues, coupled with the large waste, imply that efforts to address medical spending need to be among our highest priorities.

A Large Part of Spending Is Wasteful

A large number of studies have estimated the waste in health care. Estimates suggest that between one-quarter and one-half of medical spending is not associated with improved health, although this view is not without controversy.

High prices are a second form of wasteful spending.

Excessive administrative costs are a third form of wasteful spending.

The fact that there is so much waste in medical care does not mean that spending more is necessarily bad.

But neither should we assume that all spending increases reflect value, as indicated by the rising prices of established drugs or of services from newly merged hospitals. Most fundamentally, the presence of significant waste argues that we ought to pay at least as much attention to ways of improving efficiency as we do to whether and how people should get covered.

Rising Spending Worsens Inequality

The second problem with medical spending is that it feeds into the already severe harms caused by growing income inequality. The most important fact about the income distribution in the United States is that it is becoming increasingly unequal: Real incomes have soared at the very high end, risen modestly in the next few deciles, and been stagnant or falling at the bottom.

Rising medical costs combined with stagnant incomes for a large share of the population mean that more people will need help paying for medical care. A family at the median income level, whose income is relatively constant, has had no easy way to pay the roughly $10,000 rise in the cost of a family health insurance policy between 1999 and 2017.

At the same time that needs are increasing, however, government resources are being cut. Governments at all levels are loath to raise taxes, and some are even cutting them. Total government revenue as a share of GDP has been relatively constant for several decades and is projected to fall with enactment of the federal tax bill in December 2017.

This combination of increased need for help and fewer resources to spend inevitably creates problems. Three problems are particularly apparent.

Fewer People Are Covered by Private Insurance

Public Programs Turn to Rationing

Other Social Programs Are Crowded Out

Even with both explicit and implicit rationing, rising costs for medical care translate into higher overall government spending. Given the constraint on raising money, this necessarily means that less money is available for other government services—for example, spending on early childhood education or income subsidies for low-income workers.


Additional medical spending brings both benefits and costs to society. For this reason, the question about how much money a country such as the United States can afford to spend on medical care is not well formulated. But that ambiguity does not mean that additional medical spending is innocuous. The United States is being pulled apart as a country, separating into rich and poor. Every dollar that is spent on medical care is one less dollar available for addressing the problems of an unequal society, and one more dollar that is difficult for much of the population to pay. One of the goals for health policy must be to reduce social and economic disparities, not increase them.



By Don McCanne, M.D.

In this article David Cutler reminds us of two problems with health care spending that demand our attention: Wasted dollars on health care could be better spent on the typical American family, and high medical costs along with stagnant incomes and limits on government funding lead to increased health and economic disparities.

Reducing waste is relatively straightforward under a single payer national health program. Cutler calls for improving efficiency and two of the ways that single payer would do that include a tremendous reduction in administrative waste by converting to a well designed single financing system, and a reduction in services of negligible value by improving allocation of our resources such that services of greater value displace those of little value.

But look at the potential single payer would have at helping to address our social and economic disparities. Although David Cutler remains silent on single payer, it is obvious to us that the problems he discusses cry out for single payer reform.

The publishers have granted free access to this article. You should take advantage of that to read the full article.

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