National health expenditures

by Richard S. Foster, chief actuary, Centers for Medicare and Medicaid Services

Annually, in early January, much attention is paid to the release of U.S. National Health Expenditures (NHE) from the Office of the Actuary at the Centers for Medicare & Medicaid Services.  These often-cited data not only show how much of the economy is devoted to health care but also disentangle many of the underlying trends and relationships in the health sector.  While the results of each year’s spending report are covered widely in the media, little notice is given to how we develop this complicated matrix of spending for health care goods and services (such as hospital or physician services, or prescription drugs), the third party insurers and programs that pay for care, and the sponsors that ultimately bear the burden of health care costs.  This post offers a brief summary of how we prepare the estimates of national health spending.

It usually comes as a surprise to people when they learn that there is no nationwide, integrated system of reporting health expenditure data in the U.S.  With a team of about 10 economists and statisticians, the Office of the Actuary assembles estimates of total health expenditures for historical years and publishes the results annually on behalf of policy makers, researchers, health care professionals, and anyone else in need of such information.  We also make NHE projections for the next 10 years and periodically publish special studies on health spending by state of residence, state of provider, and age and gender.  These accounts date back to 1960 and were started through the pioneering efforts of the renowned health economist Dorothy P. Rice, who later became the director of the National Center for Health Statistics.

Not surprisingly, an accounting system that tracks over $2.5 trillion in annual spending requires the use of numerous underlying sources of data and information, together with the best available economic and statistical techniques.  We base the NHE accounts on the highest quality, most comprehensive data available on the health sector, such as the Census Bureau’s Economic Census and administrative data from the Medicare and Medicaid programs.  However, because these sources don’t cover all of the spending categories in the NHE accounts, we also use a variety of other sources of data and information, from both government and private-sector sources.

To construct the matrix of national health expenditures by goods and services, crossed with program and payer, we follow five general steps:

  1. Estimate total spending for each health care good and service category using provider revenue from the Economic Census, Service Annual Survey, and other available sources.
  2. Develop estimates of public program spending (such as for Medicare, Medicaid, and the Department of Veterans Affairs) by good and service category using administrative and budget data.
  3. Estimate total private spending as a residual (total spending less public program spending for each category).
  4. Allocate private spending to out-of-pocket, private health insurance, and other private spending using payer data from sources such as the Census Bureau’s Service Annual Survey. We verify the trends in these series by comparing them with other available data such as the Consumer Expenditure Survey and various private health insurance surveys and databases.
  5. Estimate spending for government public health activity, program administration and the net cost of private health insurance, and health care investment (such as non-commercial research and the purchase of structures and equipment) using government budget data, Census Bureau surveys, and data from A.M. Best.

Once these steps are completed, we prepare estimates of health spending by sponsor, which identify the households, businesses, and governments that ultimately finance health care programs and payers.  To develop these estimates, we use data such as the Medical Expenditure Panel Survey (Insurance Component) and the Medicare Trustees Report, as well as a number of other sources. Finally, we subject all of the NHE estimates to comprehensive internal and external expert review.  The results are published in Health Affairs and almost always rank among the journal’s top-three most widely read articles each year.

A more detailed description of the methods used to construct the National Health Expenditure accounts is available at http://www.cms.gov/NationalHealthExpendData/downloads/dsm-10.pdf.  The detailed NHE data tables and related information, including the latest estimates through 2010, are available at  http://www.cms.gov/NationalHealthExpendData/01_Overview.asp .

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