Top healthcare cost categories

This post examines the size of the different components that make up the total $2.6 Trillion National Healthcare Expenditures (NHE) of the USA. It also looks at the different growth rates of the components.

This is the third installment in our series on US healthcare costs. For background to this project, which is all about identifying fertile opportunity spaces resulting from runaway healthcare costs, see the introduction; the first installment; and second installment of the series.

Components of $2.6 Trillion US National Healthcare Expenditure (2010)

NHE components as percentage of NHE

The chart above depicts the $2.6 Trillion of US National Healthcare Expenditures in 2010 by category (1). These top 5 categories comprise the majority of this expenditure (74% of the total):

  • Hospital expenditures (31%);
  • Physician and Clinical expenditures (20%);
  • Prescription Drug expenditures (10%);
  • Administration & total Net Cost of Health Insurance expenditures (7%); and
  • Nursing Care Facilities and Continuing Care Retirement Communities (5%).

Long term growth trends

The first chart below shows the long term growth trends of these top 5 components of NEH (corrected for population growth and inflation). The second chart shows these same top 5 components as a percentage of NHE, so you can see how the relative importance of these components changes over time.

Top f healthcare cost components

Components of NHE as percentages

There are several interesting macro-trends illustrated here.

  • Hospital and Physician and Clinical expenditures have always been the dominant expenses, and still are. There have been some interesting “wiggles” in growth rates in these two categories along the way (more in my next post).
  • Prescription drug expenses maintained a relatively constant share of overall costs (5% of NHE)  from 1980-1994, but experienced very rapid growth during the period from 1994-2004, increasing share of overall costs during this period from 5% to 10%. (Since 2005, this growth has flattened a great deal). As a result, prescription drug expenses have gone from being the fifth largest component (in 1980) to the third largest component of costs in 2010, but with a relatively moderate current rate of growth (more below).
  • Administrative costs and the net costs of health insurance have been on a relatively stable growth path for the last 50 years. Unfortunately that growth is at a faster rate than both GDP and overall healthcare costs, and as a result these overhead costs are chewing up a larger and larger share of our healthcare dollar (see prior post on this topic). The increase in share is relatively slow, however. While undesirable, it is far from being the root cause of rapid healthcare cost growth.
  • The costs of nursing care facilities and continuing care retirement communities have been growing steadily but have been overtaken in importance by drugs and administrative overhead costs, moving from the third largest cost in the 1980’s to the 5th largest in 2010. This is part of a larger story and will be the subject of a future post.

Prescription drug costs

Prescription drug cost growth details

If we zero in on Prescription Drug expenditures from 1994- 2010 in the two graphs above, we see two distinctly different periods of growth, with approximate growth rates (of Real (after inflation) Drug expenditure per capita) being 10% from 1994-2004 and <2% from 2004 until 2010. And if you look at the curves, you can see the roll-off in growth rates starting in 2002.

This strongly suggests something very good happened in 2002-2004 that reduced what was previously a worryingly rapid growth rate in drug costs to something quite manageable. In fact, from 2004 to 2010 the real growth rate per capita in drug costs (1.8%) was only slightly above the overall growth rate of real GDP per capita (approx. 1.5%), and well below the overall healthcare growth rates (real, per-capita) of 3.5% (discussed in this prior post).

This leads me to some takeaway conclusions relating to Prescription Drug costs.

  1. Runaway Prescription drug costs do NOT seem to be at the heart of the healthcare cost growth problem (at least since 2004), although in prior decades they were indeed a big contributor to the problem.
  2. We should learn from whatever changed in 2002-2004 to impact drug cost growth, and see if there are lessons there for other parts of the system (see future posts on this topic).

This seems at first glance to conflict with a lot of what one reads in the popular press. I include a couple of examples at the bottom (“Related articles”). One of these points out that drugs cost more in other countries (I agree). The other (from the AARP Policy Institute) points out that a basket of specific drugs have risen in price since 2004 by more than CPI (inflation). I agree with that too. And the AARP data is not especially different from the findings here, although they focus on a specific basket of drugs, whereas this analysis deals with total National Health Expenditures on Prescription drugs.

The implicit assumptions/conclusions/opinions of articles like these are that drug costs should not be growing faster than inflation. And that drugs should not cost more in the US than elsewhere. One could debate these assumptions actually.  But let’s assume we agree with them for now. Yes, that suggests we could work on containing drug costs (and certainly they represent the third largest component of NHE). Along with working on containing the costs of the other 14 components of NHE, which are also all growing faster than inflation.

However, the key takeaway for me is that these drug costs are actually not currently the big driver of healthcare cost growth (they were more concerning prior to 2004). If we really want to contain healthcare cost growth, I believe we need to look for opportunities that go beyond attacking Big Pharma.

Lesser components of NHE

Cumulative lesser NHE components
The graph above shows the remaining components of NHE (ie excluding the top 5 components discussed above). This graph shows their cumulative percentage, and you can see it has been relatively stable as a percentage of NHE since 1980, except for some growth in the 1994-2002 period – now reversed – which was primarily a result of fluctuations in two categories: “Other Health, Residential and Personal Care”; and “Home Health Care”. In fact, many of these minor categories have been decreasing as a percentage of total NHE, although not in absolute terms.

Conclusions about these lesser components of NHE

  1. With the possible exception of “Other Health, Residential and Personal Care”; and “Home Health Care”; and perhaps “Other Professional Services”, these components of NHE appear to be relatively second order in importance for understanding overall health cost growth, in part because of their relatively small overall magnitude, and in part because none of them exhibit especially large growth rates.

Next installment of this work

In my next post I am going to look more closely at the two biggest categories that dominate healthcare costs: “Hospital expenditures”, and “Physician and Clinical expenditures”.

Meanwhile, if you want to get involved or get more details about this project, or get access to later portions of this work that might not make it into this blog:
Sign up to be part of the discussion/information loop (no charges).





  1. See references in earlier installments of this series for data sources. Data is primarily from various US Government sources.


  1. […] In my next post I am going to look more closely into the big gorilla of healthcare costs: Personal Healthcare Expenditures. […]

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