The Magnitude of the Medical Expenditure Increase As both newspapers and pay stubs remind us, the health care sector is a large part of the economy; spending on health care, $666 billion in 1990, exceeded 12 percent of GNP. At the federal level, Medicare (for the elderly) and Medicaid (for the poor) represent 15 percent of outlays. Medicare is the second largest domestic program of the federal government. At the state level, Medicaid is 11 percent of total expenditures (1991 Economic Report of the President, Tables B-76, B-82). Despite these magnitudes, I think the cnlx of public concern over health care costs comes from the data in Table 1; real medical care expenditures per capita have been growing at around 4 percent per year for five decades, except - Joseph P. Newhouse is John D. MacArthur Professor of Health Policy and Manage- ment, Harvard University, Cambridge, Massachusetts. 4- Journal of Economic Perspectives Table 1 Growth in Real Health Care Expenditure and GNP, by Decade (% per year) in the 19605 when growth was even more rapid. At these rates of growth, the share of GNP devoted to medical care has also been steadily growing. Neither citizens nor economists, of course, are especially concemed about rapid growth in most sectors of the economy, like the personal computer industry, the fax machine industry, or the cellular phone industry. The conven