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Estimates of National Health Spending

By September 8, 2014Commentary

From 1990 to 2008 average annual health spending growth was 7.2%, compared to a 5.2% average (unadjusted for inflation) GDP increase.  In the last several years, both GDP growth and health spending increases have been more muted, although health spending is still growing faster than GDP.  The Office of Actuaries at CMS projects that for the period from 2013 to 2023, spending growth will reaccelerate, although not to previous rates, with that average increase set at 5.7%, about 1.1% above nominal GDP growth.   (OOA Spending Report)   In 2013, the report says spending likely rose by 3.6%, with continued slow economic growth, Medicare payment reductions and Medicaid payment, benefit and enrollment increases canceling each other to a large extent.  The rate of growth is expected to rise to 5.6% in 2014, largely due to increased private and Medicaid coverage under the reform law.  And looking ahead one year, in 2015 growth in spending will be 4.9%, with the lower rate due to slowing enrollments under the reform law and reductions in Medicare payments to providers.  Growth across service categories–hospital, physician and drugs–is projected to be relatively similar, but we suspect that drug costs may accelerate more than expected as we see greater and greater introduction of very expensive specialty drugs.  The hepatitis C drugs were just the start of this trend and we are now beginning to see another wave of expensive heart failure and cancer drugs enter the market.

Among primary factors in the recent slowdown in health spending are a very slow economic recovery; the massive shift to more government funding for healthcare, accompanied by dictated provider payments which have small yearly price increases or even reductions; and the ongoing shift to private health plans with large cost-sharing–deductibles and copayments.  Moving forward, the economy has and is projected to continue to improve, but government programs will likely continue to stifle provider payment rises.  The most important factor in limiting health care spending increases, however, seems to be the very slow rise in personal incomes, which coupled with greater health care premium and cost of service sharing, really crimps the ability and willingness of households to seek health care, even when it may be needed.  When coupled with the report’s projected 6% plus annual increases in private health insurance premiums and likely higher cost-sharing, the burden on ordinary, working households is the major health cost issue which needs to be addressed, now that we are giving free health care to every slacker in the country.  The report does not reflect any likely slowdown in economic growth or even a recession during the period.  This would likely slow health spending somewhat, but not enough to prevent the continued widening of the gap between GDP and health spending growth.  And one big wild card is whether the reductions in Medicare provider payments and the low Medicaid payment rates can be sustained without serious impact on access to care and/or provider financial condition.  It seems likely to us that at some point providers will demand higher payments and likely get them.

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