What is the real cost of healthcare?


There is a constant dialogue about increasing healthcare costs, and scrutiny over the cost of prescription medications. Pharmaceutical and medtech companies developing life saving therapies are almost vilified for making a profit. Medical Device companies are being forced to pay a 3% excise tax, greatly impacting the rate of innovation and jobs in that part of the industry.

There is a fallacy that exists that our healthcare companies don’t have the usual business forces to deal with and the expectation that when it comes to spending we should get our healthcare for nothing, and our RX for free (that was a poor Dire Straights reference.

This year US spending on healthcare hit $3.8 trillion. Deloitte broke down our healthcare spending into this handy chart. In this breakdown you can see that prescriptions account for around $259 billion and medtech for around $84 billion.


So I decided to take a look at what else we are spending money on, particularly our guilty vices that are actually adding to the rising healthcare costs.

Using data from the Bureau of Labor Statistics, the “average” American household which has an income of $63,000 spends more than $8,000 on goods and services it does not actually need. Households are further divided into nine income groups. The lowest is households with income less than $5,000 a year. It is hard to imagine how such a household could exist. But, the government definition includes people who rent rooms or other living spaces, so in reality a college student or group of college students would qualify. The highest income group contains households with incomes of over $70,000 a year.

Here is a breakdown on some of that spending:

Annual Amount Spent Per Household: $380
% of Total Annual Expenses: 0.8%

The average household spends more than $380 each year on tobacco products and smoking supplies, which includes cigarettes, cigars, pipes, and chewing tobacco. It is worth remembering that this average includes households where no one pays for tobacco products. Despite this fact, tobacco’s portion of the average household’s budget, 0.8%, is larger than what Americans spend on fresh fruit and milk combined. A person who smokes a pack of cigarettes a day in New York state will spend more than $4,000 a year, which is roughly 10% of the average American income before taxes.

Tobacco use remains the single largest preventable cause of disease and premature death in the US, yet more than 45 million Americans still smoke cigarettes. As of 2010, there were also 13.2 million cigar smokers in the US, and 2.2 million who smoke tobacco in pipes. Annual Health care costs is $96 billion.

Annual Amount Spent Per Household: $435
% of Total Annual Expenses: 0.9%

In 2009, the average American household spent $435 on beer, wine, hard liquor, and mixed drinks. This is more than the amount spent on all non-alcoholic beverages combined. Despite the higher prices often paid in restaurants and bars, the majority of money spent is on alcohol is for drinks consumed in the home. Households consisting only of a husband and wife spent an average of $582, roughly $400 more than single-parent households. On average, household spending on alcohol increased 35% from 1989, but the percent of their total budget spent on drinks is about the same: 1% in 1989 versus 0.9% in 2009. Last year there was $197 billion in alcohol sales in the US.

The cost of excessive alcohol consumption in the United States in 2006 reached $223.5 billion or about $1.90 per drink according to the CDC

Eating Out
Amount Spent Per Household: $2,619
% of Total Annual Expenses: 5.3%

Food away from home includes all meals at fast food, take-out, delivery, full-service restaurants, and at vending machines and food carts.  In 2009, the average household spent $2,619 on food away from home, compared to an average $1,762 in 1989.  The group which spent the most in this category, relative to household income, are those which make less than $5,000 a year.  This group spent an average 6.2% of their total budget on food away from home. Those making between $5,000 and $9,999 spent 4.7%. Last year there was $683.4 billion in restaurant industry sales.

Obesity now accounts for almost 21 percent of U.S. health care costs – more than twice the previous estimates, reports a new study. That is around $190 billion.