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Healthcare spending in the U.S. sends damaging ripple effect across other major sectors, households, Moody's report says

Households and businesses made up nearly half of the spending, meaning consumers, businesses are unable to spend in other sectors.

Beth Jones Sanborn, Managing Editor

Significantly higher healthcare spending in the United States will continue a damaging ripple effect across the economy, crunching public sector budgets and those of businesses and households as well. That's according to a new report from Moody's Investor Service.

The U.S. spends almost double what other high-income countries spend as a share of their economies, Moody's said, totaling $3.3 billion in 2016 or 18 percent of GDP. Households and businesses made up nearly half of the spending. 

"An aging population and rising costs will drive spending higher, with credit negative implications for the public and private sectors," Moody's said.

Rising healthcare spending will also strain public sector budgets. Medicare and Medicaid funding exposes state budgets to ballooning healthcare costs, as Medicaid accounts for nearly 30 percent of states' spending and 16 percent of their own revenue.

State Medicaid spending is projected to increase faster than tax revenue over the next decade, and will absorb an even greater share of state resources. Medicaid expansion states face greater uncertainty thanks to cuts in federal contributions that could further strain budgets.

Some states also face additional pressure and credit risk from employee health coverage costs. For some states, that includes retiree health benefit coverage and other postemployment benefit liabilities.

Growing healthcare costs also impact America's households, which are unable to spend their money in other sectors when their healthcare takes up more of their resources.

Health insurance premiums and out-of-pocket expenses represent the bulk of U.S. household spending on healthcare. Roughly half the population get their healthcare coverage from their employer, but premiums have grown faster than wages.  Medicare beneficiaries aren't immune either, since they have to pay premiums and then also purchase supplemental coverage for services not covered like vision and dental.

"The impact of healthcare costs on household finances and well-being reverberates through the U.S. economy since household consumption accounts for nearly 70 percent of annual economic output. The erosion of households' purchasing power could weaken the retail goods and services sectors, whereas the impact on households' debt repayment capacity might affect the large US consumer finance sector," the report said.

Economic growth is also being increasingly encroached upon by healthcare spending in that the high spend comes without notable improvements in population health compared to countries that spend less, and potential investments in education and infrastructure are sidelined because resources have already been soaked up. This trend could mean prolonged stalling of economic growth potential and could serve as a barrier to U.S. businesses becoming more competitive.

Companies may increasingly find themselves at a competitive disadvantage to foreign competitors as a result of rising employee medical insurance costs and inability to fund growth and improvements. U.S. employers are employing new strategies to deal with the swelling costs including paying for their employees' healthcare costs, rather than purchasing a policy from an insurer to cover claims and offering plans with limited networks or higher out-of-pocket costs such as higher deductibles. But these solutions come with pitfalls too.

"Self-insured companies can save money upfront but increase their exposure to unforeseen healthcare costs. And whereas plans with high deductibles and limited networks might also result in cost savings to employers, they may be less effective in attracting and retaining a competitive workforce. Moreover, some larger employers have started expressing concerns that high deductibles are challenging the ability of their employees to afford healthcare services, which can affect employees' well-being and dampen labor productivity," Moody's said.

Twitter: @BethJSanborn
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