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In addition to the direct impact on employers and employees, these increasing health care expenditures fuel inflation in the rest of the economy as the costs of the products produced must be increased to account for the higher expenditures under employee-benefit plans.

C. Consumer Expenditures

All of the spending for health care eventually comes from individuals, whether it is in the form of taxes, insurance premiums, or direct expenditures on health care. The following table displays national health expenditures per capita through these various sources in FY 1976.

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*Includes philanthropic spending and industrial in-plant health services.

Source: Gibson, Robert M., and Mueller, Marjorie Smith. "National Health Expenditures, Fiscal Year 1976." Social Security Bulletin, Vol. 40, No. 4, April, 1977.

An increasing portion of personal income in the United States is being spent on personal health care services. As the following table shows, in FY 1976 approximately 9.2 percent of personal income was spent on personal health care service, compared with 6.5 percent in FY 1965.

PERSONAL HEALTH CARE EXPENDITURES AND PERSONAL INCOME,
SELECTED FISCAL YEARS, 1950-1976

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Source:

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Department of Commerce, Bureau of Economic Analysis; and Social
Security Administration.

before:

In short, people are spending more on health care than ever

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They are spending more through taxes for public programs;
They are spending more on health insurance premiums;

They are spending more on direct health care expenditures;

They are foregoing some wage increases because the costs of health insurance fringe benefits are increasing; and They are paying more for goods and services as health expenditures affect the costs of production.

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III.

WHY HAVE EXPENDITURES FOR HEALTH CARE INCREASED?

A number of interrelated factors have contributed to the increasing costs of health care. It is thus difficult to assess their relative impact.

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One cause of increasing expenditures is an increase in unit price. This is difficult to quantify in the health care field because the character of the products, or services, does not remain constant. The content of a physician visit or day of hospital care changes significantly over time. For example, the increase in the charges for a day of hospital care from 1965 to 1975 would reflect not only a change in the price for essentially the same services as were provided in 1965 but also the charges added on to pay for increases in staff and in technology. In other words, part of the increase is essentially a matter of paying a higher price for the same thing and part of the increase is for a new, higher level of services.

The Social Security Administration estimates that price alone accounted for approximately 55 percent of the growth in personal health care expenditures from FY 1950-FY 1976. The balance is accounted for by changes in population, changes in the kinds of services provided, and changes in use rates. The relative contribution of price increases has varied during this time period, increasing after 1965, declining during the Economic Stabilization Program, and jumping dramatically following the expiration of controls, as the following table indicates.

PERCENTAGE OF TOTAL INCREASE IN PERSONAL HEALTH CARE
EXPENDITURES ATTRIBUTABLE TO PRICE INCREASES,
SELECTED PERIODS, FY 1950-FY 1976

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It should be noted that these estimates, while the best available, may tend to overstate somewhat the portion of the personal health care spending increase which is due to price. The data are derived in part from the CPI medical care price indices, which can reflect to some degree increases due to improvements and/or increases in the services provided.

A recent staff report of the President's Council on Wage and Price Stability, "The Rapid Rise of Hospital Costs," by Feldstein and Taylor, provides a method for determining the component of increasing hospital expenses per day which can be attributed to increasing prices paid by hospitals, as distinguished from the increase which is due to other factors. The study estimated that the average annual increase in hospital expense per patient day of 9.9 percent from 1955 to 1975 could be broken down into its component price and imput factors as follows:

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The price factors were estimated to account for about one-half (52.6 percent) of the increasing hospital expense per day from 1955-1975. The remaining half of the increase can be attributed to increasing numbers of employees and increasing amounts of non-labor inputs.

Corresponding estimates of the component parts of the average annual increase in expense per day for selected periods from 1955-1975 are presented below.

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ESTIMATED COMPONENTS OF INCREASED HOSPITAL COST PER PATIENT DAY, SELECTED PERIODS, 1955-1975

Average Cost Per Patient

1955- 1955- 1966- 1955- 1960- 1966- 1969- 1970- 1971- 1972- 1973- 1974-
1975 1966 1975 1960 1965 1969 1970 1971 1972 1973 1974 1975

Components of overall percentage increase in average cost per patient day

Day--Average Annual

1/

1/

1/

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Day--Total Increases

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

100.0

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20.3

11.7 20.3 21.7 11.3 15.3

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29.0

32.8 24.6 31.9 30.8

49.3 44.5 44.9 53.6 42.1 47.8 43.2 59.3 35.5 31.6 42.9
13.7 11.4 12.2 15.4 12.5
47.9

32.5

29.5

Price Factors

52.6

50.7 55.5

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55.1 46.4 57.9
40.6 35.8 43.5 37.7 45.1 36.3 43.9 30.7 33.3
10.1 19.7 11.6 8.7 12.8 15.9 12.9 10.0 31.1

52.2

56.8

40.7

64.4 68.4

23.3 16.2 30.4
57.1

24.8 33.2
43.6 23.9

Source:

Data derived from Feldstein, Martin, and Taylor, Amy. "The Rapid Rise of Hospital Costs."
Wage and Price Stability, Staff Report, January, 1977.

1/ May not add to total due to rounding.

Council on

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