Moderate health spending growth expected

July 18, 2016

Over the next decade, health spending is expected to grow at an average rate of 5.8% per year.

Health spending is projected to grow at an average rate of 5.8% per year-4.8% on a per capita basis-for 2015 to 2025, exceeding the expected average growth in gross domestic product (GDP) by 1.3 percentage points per year, according to new estimates from the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS).

As a result, the health share of the economy is projected to be 20.1% at the end of this period, up from 17.5% in 2014. The study also finds that the percentage of the U.S. population that is uninsured is expected to be 8% in 2025, down from about 11% in 2014.

The new findings appear as a Health Affairs Web First article.

Keehan

“As the initial impacts associated with the Affordable Care Act’s coverage expansions fade, growth in health spending is expected to respond to changes in economic growth, faster growth in medical prices, and population aging,” the study’s first author Sean Keehan, senior economist, Office of the Actuary, CMS, tells Managed Healthcare Executive. “Projected national health spending growth, though faster than observed in the recent history, is slower than in the two decades before the recent Great Recession, in part because of trends such as increasing cost sharing in private health insurance plans and various Medicare payment update provisions.”

By the end of the projection, federal, state and local governments are projected to finance 47% of national health spending (from 45% in 2014), according to CMS.

In the study, Keehan and the coauthors project that economic and income growth will accelerate somewhat during the period, and remain generally higher than in the recent past. “This has historically led to higher growth in the use and intensity of healthcare goods and services,” Keehan says.

For economic growth, Keehan says that he and the coauthors are projecting that this will be faster during the projection period than it has been in the recent past.

“Nominal GDP averaged 2.6% for the period 2008 to 2014 and is projected to grow at an average annual rate of 4.4% for the period 2015 to 2025,” according to the study.

“For medical prices, the study mentions that the Personal Health Care Price Index grew at a historically low rate in 2015 of 0.8%,” says Keehan. “We expect that this rate of growth will gradually increase and that medical price growth will average 2.8% for the 2020 to 2025 period. This projection is based on assumptions of increases in economy-wide price growth from the OASDI Trustees Report.”

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In addition, the authors expect medical price growth to be a bit faster than economy-wide price growth “in part because of rising prices for the inputs required to provide healthcare-specifically, growth in healthcare wages.”

The impact of faster growth in incomes is expected to lead to 5.6% average growth in private health insurance spending (including private managed care plans) in the 2017 to 2019 period, the highest growth for that payer in our decade-long projection window, according to the study.

The national health expenditure projections are developed using actuarial and econometric modeling methods, as well as judgments about future events and trends that influence health spending, according to Keehan.

“The projections are based on current law for Medicare and use the economic and demographic assumptions from the 2016 Medicare Trustees Report, updated to reflect the latest macroeconomic data. They are also consistent with assumptions from the 2015 Medicaid Actuarial Report,” Keehan explains.

“We are still on the upward climb of baby boomers entering Medicare,” says Jeff Hoffman, senior partner, Kurt Salmon. “The numbers are becoming larger every year, as well as the number of people living longer. Let’s not forget that people over 65 years of age use inpatient hospital care at four times the national average and those over 85 years of age use hospital care at eight times the national average. As the ranks of these demographic groups increase, they have disproportionate impact on healthcare spending. The fact that the rate is less than 6% is still impressive.”

While the industry is moving toward value-based payments, most providers still are volume-based providers, according to Hoffman. “The beginnings of value-based care will have some impact going forward,” he says.

Hoffman notes that with Medicare growth, Medicaid expansion and federal funding of exchanges, government spending makes up 65% of the payer market.

“The government will continue to reduce spending through the continued use of payment cuts and reductions and the advancement of shared-risk incentives,” he says.  

Every year CMS’s Office of the Actuary releases an analysis of how Americans are expected to spend their healthcare dollars in the decade ahead. The predicted 5.8% growth rate is identical to the rate predicted for 2014 to 2024 in the Office of the Actuary’s 2015 report, published last year in Health Affairs.