Blog

Pharmaceuticals Accounted for Only 11% of the Rise in Health Care Costs in 2016

By / 5.29.2017

For the past several years, PPI has analyzed the key drivers of health care costs. This year, as the Senate considers repealing the ACA, it’s especially important to correctly attribute the causes of rising health care costs.

Our main result is that rising labor compensation for health care workers accounted for 44% of the increase in personal health care spending in 2016. This preliminary analysis is based on compensation data from the Bureau of Economic Analysis, wage and employment data from the Bureau of Labor Statistics, and projected health care expenditures from the Centers for Medicare and Medicaid Services.  In dollars, estimated labor compensation for health care workers rose by $61,5 billion in 2016, compared to a total increase of $139.1 billion in personal health care spending. (We will update these estimates after the BEA publishes its annual revision in July).

The rise in labor compensation was driven by a 2.5% increase in private and public health care employment in 2016, the biggest increase since 2008, and far in excess of population growth.

What about pharmaceutical costs? According to the latest report from the QuintilesIMS Institute,  spending on ‘medicines’ (pharmaceuticals) rose by $14.8 billion in 2016, net of estimated rebates and other price concessions by manufacturers. Consequently, net spending on pharmaceuticals only accounted for 11% of the increase in personal health care spending in 2016.

All told, the increase in labor compensation for health care workers is 4x the increase in net spending on pharmaceuticals.  To put it another way, any savings on drugs will be very quickly eaten up by increased labor costs. As a result, the only sustainable way to control health care costs is to restrain the growth of health care employment.