U.S. Healthcare Spending by Sector: What to Know

The U.S. is an outlier in terms of healthcare sector size, by all measurements. Data from the Centers for Medicare and Medicaid (CMS) estimates that U.S. national healthcare expenditures reached $4.3 trillion in 2021, or an average of $12,914 in total spending per person. By 2022, they had grown 4.1 percent to a total of $4.5 trillion, or $13,493 per person.

According to research by the Commonwealth Fund, healthcare sector spending made up 17.8 percent of our gross domestic product (GDP). The second-highest spending was made by Germany, who still trailed behind us at 12.8 percent of their GDP. Germany’s spending is still much more comparable to other countries than the U.S.; in close pursuit, we find France at 12.4 percent, the UK at 11.9 percent, Switzerland at 11.8 percent, and Canada at 11.7. percent, of their total GDPs, respectively.

In the first article of this series, we looked at how the U.S. healthcare sector is measured, including the entities responsible and their methodology. This piece details each activity that comprises the enormous U.S. healthcare sector. We can group these into two major categories: healthcare services and goods, and public and private spending for healthcare and related initiatives.

Both of these categories can have their size measurably impacted by three powerful forces: population growth, healthcare inflation, and technological advances.

Hospital care is a major component of healthcare spending, covering the costs associated with inpatient and outpatient services, emergency care, surgeries, and other medical procedures provided by hospitals.

These facilities play a central role in the healthcare system, and their services account for a substantial portion of total healthcare spending, which reached $1,355 billion in 2022. Of that total, $1,188.9 billion was covered by different types of insurance (public and private); the remaining expenditures were covered by out-of-pocket payments, workers’ compensation, and several smaller programs with state, federal, and private funding sources.

Spending on physician and clinical services includes payments for office visits, diagnostic tests, preventive care, and other services provided by trained providers including physicians, nurses, and other health professionals. Spending in this category, while less than that of hospitals, still accounts for a significant amount of overall healthcare expenditure; these costs totaled $884.9 billion in 2022.

Prescription drug expenditures cover the costs of medications and pharmaceutical products prescribed to patients for the treatment of various medical conditions. The rising cost of prescription drugs has been a notable factor contributing to overall healthcare spending, and pharmaceutical expenses continue to play a substantial role in the healthcare sector’s financial landscape.

The costs of prescription drugs contribute to total sector size in many different forms, including out-of-pocket costs. All payer sources included, the 2022 total expenditures reached $405.9 billion; of this, $56.7 billion was paid for by patients out of pocket.

Medical equipment can range from disposable personal protective equipment (gloves, needles, disinfectant, etc.) to durable medical equipment administered by a regulated distributor for patients with a valid prescription (such as a continuous positive airway pressure or PAP machine, used to treat sleep-disordered breathing). It also includes large and expensive medical devices purchased or leased by hospitals and other facilities such as MRI machines, paging systems, and all of their requisite services to operate and maintain them.

On the supplier side, the design, development, and manufacturing of medical devices and equipment can range from relatively simple, high-volume production and distribution for items such as bandaids, to comprehensive research and development protocols for novel monitoring technologies that open doors for innovative new models of care.

For economics analysis purposes, some of this activity is categorized as life sciences (pharmaceutical) product development, while other activities might fall under prescriptions. There can also be components of technology investment, making quantifying this segment accurately somewhat of a challenge.

This category includes spending on nursing care facilities, assisted living facilities, and continuing care retirement communities that provide long-term care services to individuals with chronic illnesses or disabilities. As the population ages, spending on long-term care services becomes increasingly important in the healthcare sector.

Most of the cost for these services is staffing, as workers require different types of medical training and certifications. All payer groups ‘ spending on this area in 2022 totaled $191.2 billion.

Spending on home healthcare covers services provided in a patient’s home, including skilled nursing care, rehabilitation, and assistance with activities of daily living. Home healthcare services contribute to efforts to provide care in more cost-effective and patient-preferred settings, with total costs in 2022 of $132.9 billion.

While very similar to long-term nursing care, most home healthcare services are intended for shorter-term care durations, such as post-operative recovery, or non-critical disease monitoring such as diabetes or sleep apnea. They tend to have more expenses that originate from devices and technologies for monitoring but still generate most of their costs from medical personnel, which includes a small amount of physician time overseeing the hands-on medical team activities.

Dental services encompass spending on dental care, including preventive services, restorative procedures, and other dental treatments, which totaled $165.3 billion in 2022.

While dental services represent a smaller portion of total healthcare spending than other categories, they contribute to overall healthcare costs and are an integral part of comprehensive healthcare. A growing body of research suggests poor dental health may substantially contribute to poor cardiovascular outcomes. It is possible, therefore, that the value of dental care is not fully accounted for in projections related to cardiovascular care costs and health outcomes.

When discussing healthcare, “payers” refers to administrators of health insurance. Payers can be public, private, or the government (those funded by tax sources, including Medicare, Medicaid, CHIP, and plans that cover care for veterans).

Private payers are the types of plans available for individuals through their workplace that their employer partially subsidizes, and plans that individuals can purchase through the ACA marketplace.

Private payers are for-profit companies; however, subsidies that some folks are qualified to receive on private plans through the marketplace are funded from public pools. This distinction is relevant for accurately measuring the public and private payer buckets’ size.

In 2022, private health insurance spending accounted for $1,289.8 billion of the healthcare sector size. It grew at the same pace as Medicare, with a 5.9% increase since 2021 (Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group).

Medicaid spending in 2022 was $805.7 billion, while Medicare was just slightly larger, at $944.3 billion. The two are comparable in size, but quite different in recent growth rates: while Medicare grew 5.9 percent from 2021, Medicaid grew twice as fast, at 9.6 percent.

Covid-19-related emergency plans rolled out by states to help individuals had the impact of rapidly expanding Medicaid coverage and reducing the uninsured population. Unfortunately, this expansion has recently expired, and many currently insured people stand to lose their medical coverage in the coming months. As a result, the percentage of the population without health insurance coverage is expected to decline over the next several years without any targeted legislation.

Public health activities are another significant source of spending in this category; they totaled $208.4 billion in 2022 ($116.4 billion in state spending, and $92 billion in federal spending). This would include waste-water monitoring, vaccination drives, and developing and deploying information to the public on health-related issues.

Three primary forces can significantly impact healthcare services and goods and the public/private payers. These forces vary in how easily one can quantify their impacts, but the causal relationships are clear. These forces are population growth, healthcare cost inflation, and technological advances.

Population growth is fairly straightforward—a larger population means a greater number of people who will consume healthcare resources, thereby increasing total size. Of course, not every individual within a population has homogenous health needs. Genetics, behaviors, age and gender, environmental exposure, and attitudes all contribute to variations in healthcare utilization among individuals over time.

Resources that can be spent on healthcare will be allocated differently among households. Those with more limited resources to spend are far less likely to do so on preventative healthcare over other needs.

Greater investment in preventative healthcare services has the potential to reduce healthcare utilization over time, by reducing or eliminating certain future costs. Conversely, delays in seeking care can significantly increase total healthcare utilization—conditions that will not improve over time can worsen and become far more complex and expensive to treat effectively. Conditions can become untreatable when too far advanced and result in painful and expanse declines and earlier death.

Inflation is the price growth rate for the goods and services available within the economy. Healthcare cost inflation is limited to the price growth of goods and services within the healthcare sector. Even if the amount of goods and services were to stay exactly the same, any amount of healthcare sector cost inflation would increase the total size of the sector by dollar measurement. Readers will benefit from critically assessing data that uses “adjusted for inflation” or “inflation-adjusted” dollar amounts when comparing different periods.

The health sector inflation rate is frequently provided alongside the overall inflation rate of the economy to highlight any variance between the two, or point out the lack thereof. The relationship between these two variables is interesting: historically, economic recessions, which are associated with lower overall inflation rates (except stagflation), have seen healthcare sector inflation remain relatively unaffected.

This was the case for so many years that for decades, analysts and economists believed the sector to be nearly immune to the deleterious impact of a downturned economy. This belief turns out to have been incorrect, as economic data captured since the onset of the Covid-19 pandemic-turned-endemic suggests.

Technological advances also influence the total healthcare sector size, but in both directions. These impacts are much more challenging to measure than population and sector inflation rate changes. Upfront fixed investments in infrastructures for certain technologies will increase sector size from increased technology spending in the short term. In the longer term, any gains in efficiency would reduce utilization in a successful project. The temporal lag also requires calculations to consider inflation rates to ensure one is comparing apples to apples.

The details of the calculations can admittedly become quite complex. The concept, however, is fairly straightforward and similar to the logic in support of investing in preventative care: higher costs now reduce future excess utilization while still achieving equivalent or superior health outcomes.

There are also new entrants without traditional healthcare roots. Companies from the technology sectors are entering the healthcare sector with innovative start-ups that leverage technology to provide more efficient care models. More players bringing more dollars will increase total sector spend in the technology investment bucket.

This impacts the short-term and the long-term in different ways and depends on whether the start-up manages to find success and scale up healthcare operations. In the longer term, these innovative modalities should replace traditional mechanisms of goods and services provisions with greater efficiency and improved health outcomes, in theory. In reality, much of the promised gains from these technologies remains to be realized.

The U.S. healthcare sector is notable for its complexity and the substantial financial resources invested yearly. Understanding the breakdown of spending is crucial for policymakers, healthcare professionals, and the general public alike.

Since the payers’ and services’ sides of the equation are so closely related, policies must be designed with careful consideration of their potential impact on both.