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The Latest Health Spending Projections from the Office of the Actuary

By February 21, 2017Commentary

CMS has an Office of the Actuary, which is responsible for tracking trends in national health spending and which just recently published its annual updated ten-year projection in Health Affairs.   (HA Article)   The headline is that over the period 2016-25 health costs are expected to increase an average 5.6% a year and will represent 20% of GDP by 2025 or $5.5 trillion.  The number of people covered by some form of third-party payment has risen rapidly in the last few years, driven by the Medicaid expansion and individual mandate.  That coverage expansion has led to greater use of services, which thankfully occurred when health price growth was somewhat subdued.  The current projections suggest that prices are likely to rise at a faster clip, while service growth slows, over the projection period.

For 2016 the OA thinks health spending will have increased by 4.8%, or by 3.8% on a per capita basis, to $3.36 trillion.  It believes spending will be around $3.54 trillion in 2017, a 5.4% rate of growth, or 4.4% on a per capita basis.  For comparison, nominal GDP is estimated to have risen 2.9% in 2016 and to grow 4.3% in 2017.  Medicare and private health insurance will incur faster increases in spending than will Medicaid.  This is driven by faster enrollment growth in Medicare, going from 56 million people in 2016 to 72 million in 2025, and greater price inflation for private health insurance.  In 2016 per enrollee spending was estimated at $5702 annually for private insurance, $12096 for Medicare, and $7959 for Medicaid.  In 2017 those numbers are expected to be $6040 for private insurance, $12,456 for Medicare and $8103 for Medicaid.

The service categories with the highest growth rate over the projection period are home health care at 6.7% per year and drugs at 6.3%, but almost every category is showing spending increases of 5% annually or more.  While increases in drug spending have slowed, they remain high, as more and more expensive specialty drugs hit the market and drug companies exercise little pricing restraint in regard to existing compounds.  Health insurance profits are expected to be quite high in 2017, but decline through the rest of the projection period.  Out-of-pocket spending generally increases, both in absolute dollars and as a percent of spending, meaning more financial pressure for consumers.

The Office of the Actuary projections are based on current law, so changes to the reform law, for example, could impact the trend, either up or down.  General economic trends could also affect health spending, such as higher overall inflation or faster economic growth which gives people more disposable income.  Sooner or later, no matter what, we are likely to find ourselves needing to make more drastic changes to the system to limit health spending, particularly since half of it is paid by governments, which rely on taxes for that spending.

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