Last month, the Centers for Medicare and Medicaid Services released its latest projections of health spending. These official projections showed that the health share of GDP would rise to 19.8 percent by 2020. But just as official estimates substantially understate the role of government in health spending, they fail to highlight a point that should be of concern to all Americans: by 2020, 29 percent of annual GDP growth will be absorbed by health spending.

The percentage of GDP devoted to healthcare has more than quadrupled during the past 80 years to more than one-sixth of the entire economy (figure 1.3c). Indeed, health spending has grown faster than almost all other major components of the economy.

But a better way to understand and predict the growth in the share of GDP related to health is to examine health’s share of the growth in GDP. As illustrated, health’s share of GDP growth is higher—sometimes much higher—than its average share of GDP. Think of a jar of marbles with 10 white marbles and 90 black ones. The white share of the total is only 10 percent. But now imagine adding a cup of four marbles in which the white share is 50 percent. White marbles now constitute only 11.5 percent of the total (i.e., 12 of 104), but what should be clear is that so long as white marbles constitute half of each new cup added, this average will rise, gradually approaching 50 percent. So if we want to know where the health share of GDP is headed, a good shortcut is to examine how much of the growth in GDP is accounted for by national health expenditures.

The one caveat on this is that health’s share of GDP growth rises dramatically whenever the economy slows down. This largely explains why the fraction of GDP growth accounted for by health spending was so much higher in 2000-2010 compared to 1990-2000. The former period contained four years over two recessions during which the health share of GDP growth exceeded 35 percent (2001-2002 and 2008-2009), whereas the latter contained only one (1991). In contrast, during the more typical “regular growth” years of 2004-2007, the health share of spending growth was far more modest, ranging between 16.4 and 19.8 percent.

So where are we headed? According to official government figures (produced by the CMS Office of the Actuary, i.e., the Medicare actuary responsible for making 75-year projections of Medicare spending), the health share of spending growth in 2011 will be quite typical of the levels previously experienced during 2004-2007 (figure 1.3d).

However, in 2014 this will rise dramatically to 27 percent assuming the Patient Protection and Affordable Care Act (PPACA) is implemented as scheduled. In that year, the PPACA will greatly expand access to insurance coverage, mainly through Medicaid and new state health insurance exchanges by which many millions of Americans will be eligible to receive subsidies to offset both their premium costs and out-of-pocket spending. It will decline somewhat in subsequent years, but it is worrisome that starting in 2018, this share begins to rise steadily: by 2020, it reaches 29 percent. The CMS figures stop there, so we do not know how much higher the Medicare actuary believes they will go.

What we do know is that in its June 2011 report on long-term budget outlays, the Congressional Budget Office projected that mandatory federal spending on Medicare, Medicaid, the Children’s Health Insurance Program, and exchange subsidies alone will rise to 17.2 percent of GDP by 2085. But this is a conservative, overly optimistic projection that assumes, for example, that Medicare will cut physician fees by 29.5 percent in January 2012, since that is what current law requires. Given that Congress has on 12 different occasions voted to spare physicians from the statutorily required fee reductions that otherwise would have been imposed by Medicare, a more realistic assumption is that the scheduled fee cut will never happen. Under an alternative fiscal scenario that relies on these more realistic assumptions, mandatory federal spending will rise to 19.4 percent of GDP. That is, in less than 75 years, the share of GDP going to mandatory federal health spending will by itself match the entire health share of GDP in 2019 projected by CMS.

If seven-eighths of health spending were not bankrolled by third parties, the share of GDP devoted to it would reflect what 310 million people collectively are willing to pay for it. In that context, there would be nothing inherently wrong with devoting 50 percent of GDP to healthcare 75 years from now (as the CBO projected a few years ago). But given the very large and growing share of health spending financed by government, there are two reasons to be very concerned with each increment of GDP allocated to health spending. The first is that political decisions over the allocation of resources in the “new commanding heights” are almost certainly more likely to be inefficient than those that would be made in a purely private market. The second is that every extra dollar of health spending that is federally tax-financed will generate hidden losses on the economy of roughly 44 cents. Subjecting the economy to these twin sources of inefficiency puts a drag on U.S. competitiveness whose size is directly proportional to the health share of GDP. Until and unless we substantially reduce the role of government in the health sector, the health share of GDP growth might be viewed as an early warning speedometer. By 2020, we will have nearly doubled our “speed” compared to the 1980s and 1990s. Do we really want to be going this fast?

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. 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 1.3c and Figure 1.3d and Excel spreadsheet on national health expenditures as a percentage of GDP and GDP growth  for data, sources, and methods.