Will the Slowdown in U.S. Health Cost Growth Continue? A Factor Market Perspective

Abstract

Between 1970 and 1992 growth in spending on health care services in the U.S. outpaced total consumption growth by 3.5 percent per year, and the share of spending devoted to health services doubled from 7.3 percent to 14.6 percent. Since 1992 the growth rate of spending on health care services has averaged only 0.5 percentage points faster than growth in total consumption, and thus the share devoted to health services rose much more modestly, to 15.6 percent as of 2006. This break in trend cost growth can be traced directly back to quantities and relative prices of factor inputs. Between 1970 and 1992 the share of the labor force working in health services and the relative earnings of health workers both rose dramatically, causing total health spending to surge. After 1992, the share of the labor force working in health services grew more slowly while the relative price of labor in health services stabilized at the new higher level.