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The Family Healthcare Budget Squeeze

Monday, November 14, 2011

Healthcare will overtake shelter within five years to become the single largest category of consumption. How has this happened?

The federal budget is not the only place where health spending is crowding out other spending. The share of household consumption devoted to healthcare has more than quintupled over the past eight decades. In fact, healthcare now ranks second in importance in the share of personal consumption spending devoted to it. Healthcare will likely overtake shelter within five years to become the single largest category of consumption. How has this happened?

The extraordinary productivity of the American economy over the past 80 years has made the necessities of life far more affordable for the typical family. Before the Great Depression, Americans devoted two-thirds of household personal consumption spending solely to food, clothing, and shelter. By 2010, such necessities constituted only two-fifths of all household consumption. During the same period, healthcare’s share more than quintupled to 21.8 percent of all personal consumption.

Figure 6.1b JPEG

The declining share of family spending on necessities over this period more than made up for the rising share of consumption devoted to healthcare. Healthcare is not unique in absorbing an ever-rising share of family consumption since 1929, but the aggregate increase in its share is by far the largest. Just in the past 40 years, the health share has more than doubled. No other major category of household consumption exhibits a relative rise of comparable magnitude. The one that comes closest is education spending, whose share has more than tripled since 1929—but that’s starting from a base of less than 1 percent of all household consumption.

These patterns become more visible if we examine how much we spend per dollar of healthcare spending. In 1929, Americans devoted nearly seven dollars to shelter for every dollar spent on healthcare; by 2010, that figure had declined to only $1.11. For food, the decline was even sharper: Americans spent more than six dollars on food for every dollar on healthcare in 1929, compared to only 60 cents by 2010. They spent more than three dollars on clothing for every dollar allocated to healthcare in 1929, but only 16 cents by 2010.

Figure 6.1c JPEG

The rising share of consumption devoted to healthcare reflects higher incomes, more new and costly medical procedures and drugs, an aging population, and the increasing prevalence of public and private health insurance that weakens most incentives to economize on medical care; but most importantly, it reflects the extraordinary gains in productivity achieved by America’s economy. The average American household is not having to choose between shelter, food, clothing, or healthcare for their family. In general, Americans live in much bigger houses, consume much more food, and have more and higher quality clothing than their parents or grandparents.

At the same time, this higher productivity also has allowed the average worker to earn a higher amount for a year’s work. This combination has greatly expanded how much household consumption can be allocated to other things. Given this opportunity, Americans have opted to increase their relative spending on healthcare, recreation, communication, and education.

But mathematically, this virtuous cycle cannot continue in perpetuity. Because healthcare’s share of consumption has grown so large while the share of consumption allocated to “necessities” has grown correspondingly smaller, each 10 percent increase in health spending requires a much larger relative reduction in expenditures on necessities than in the past.

It’s also important to note that the out-sized productivity gains achieved during the U.S. postwar economy up until the early 1970s have slowed. Even if productivity growth climbed back to its previous level, gains in worker compensation have lagged behind gains in productivity in recent decades.

These converging pressures mean that Americans may no longer be able to have their cake and eat it, too. So long as they could enjoy the benefits of a rising standard of living and more healthcare, Americans have shown a willingness to allocate a larger share of consumption to healthcare. It remains to be seen whether our enthusiasm for greater health spending persists if it requires a sacrifice in real living standards to achieve.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at the American Enterprise Institute. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint versions of Figure 6.1b and Figure 6.1c as well as an Excel spreadsheet on household consumption spending by function from 1929-2010 for data, sources, and methods.

FURTHER READING: Conover also writes “Is Medicare a Ponzi Scheme?” “Entitled to Leisure?” and “Feeling Poorer? Healthcare Bears Some Blame.” Joseph Antos discusses “Medicare's Failed Physician Payment Policy” and “Medicare Reform and Fiscal Reality.”

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