Rising Labor Costs Accounted for 47 percent of Increased Personal Health Care Spending in 2015

By / 9.30.2016

According to PPI estimates, rising labor costs accounted for almost $65 billion in added health care costs in 2015, or 47 percent of the total increase in personal health care spending (as reported by the latest projections from the actuaries at the Centers for Medicare and Medicaid). By contrast, IMS reports that net spending on prescription drugs rose by only $24 billion in 2015, or 18 percent of the rise in personal health care spending.


This result, which updates our previously published data for 2014, fights the prevailing narrative that healthcare spending is primarily driven by rising drug prices.. Instead, the big increase in labor compensation in 2015 is mainly being impelled by the rapid growth of health care employment.  The number of workers in the nation’s hospitals, physician offices, and nursing homes increased by 429,000 in 2015, compared to an annual average of 226,000 for the previous 5 years.

Unfortunately, this trend of rapidly rising healthcare employment driving overall spending appears to have accelerated in 2016. Healthcare employment in the 12 months ending July 2016 was more than 500,000 above its year earlier level, suggesting that healthcare labor costs will surge even more in 2016.

Meanwhile data from the BEA seem to show the pace of pharmaceutical spending slowing in 2016. Consumer spending on prescription drugs in August 2016 was 4.3% over a year earlier, less than half as fast as in 2015. There’s no guarantee that this slower pace will continue for the rest of 2016, but so far it’s a good sign.