CMS Report Predicts Faster Growth in Health Spending

Ken Terry

July 29, 2015

Healthcare will claim an increasing share of the US gross domestic product during the next 10 years, according to the latest projections of the Centers for Medicare & Medicaid Services (CMS), published online July 28 in Health Affairs.

National health spending growth for the period from 2014 to 2024 is predicted to average 5.8% annually, up from 4% for 2008 to 2013, a period that included the recent recession. By 2024, the percentage of the gross domestic product dedicated to healthcare is expected to reach 19.6%, or $5.4 trillion, compared with 17.4%, or $2.9 trillion, in 2013, the CMS actuaries said.

However, the annual growth rate during the next decade will still be far below the spending growth rates that prevailed from the late 1990s through 2007, Sean P. Keehan, from the Office of the Actuary at the CMS in Baltimore, Maryland, and colleagues note.

The major drivers of the spending rise will be the expansion of insurance coverage under the Affordable Care Act, faster economic growth, and the aging of the population. The biggest countervailing force will be increased cost sharing by health plans with consumers, the report said.

In 2014, the actuaries estimated, health spending grew 5.5%, which was the highest rate of growth since 2007. The Affordable Care Act coverage expansion was the primary driver, with 8.4 million people gaining insurance. Prescription drug spending also jumped 12.6%, mainly because of specialty drugs for conditions such as hepatitis C. In 2015, the rate of growth is expected to slow slightly, mainly because new insurance enrollment and drug spending will decrease.

In the period from 2016 to 2018, the growth in the use and intensity of services for aging baby boomers will drive annual Medicare spending growth of 6.3% compared with 4.7% in 2015, the report said. Private insurance premiums will increase by only 4.1%, on a per enrollee basis, because of increasing use of high-deductible plans, narrow provider networks, and the introduction of an excise tax on high-cost plans in 2018.

Because of rising wages for health workers, medical prices are also expected to grow in this period, and medical inflation will surpass 2% per year by 2016. By 2024, medical price inflation is predicted to reach 3%, which is double current price growth. The researchers attributed this acceleration to general inflation and higher input costs for providers, including wages.

Clinician Services Spending Expected to Rise

Medical inflation is not expected to return to the historic high rate seen in the period preceding 2008. Nevertheless, physician and clinical services spending will rise by 68% from 2014 to 2024, and hospital spending will increase by 79% during the same period, according to an analysis of the CMS data.

Renewed economic growth in the later part of this decade will spur health spending by the early 2020s, particularly in the private sector. Private insurance premiums will grow 5.6% from 2019 to 2024 compared with 5.1% from 2016 to 2018. However, Medicare spending will grow even faster because of the aging population. Medicaid costs will also keep increasing as more states expand their Medicaid programs. By 2024, those two government programs will finance nearly 40% of all national health spending. Including state and local spending, government will pay for 47% of health costs.

This year, the Medicare growth rate slowed from 5.3% to 4.7%, mainly because of lower spending on drugs and physicians. "Furthermore, reductions in physician incentive payments (for various reporting, electronic prescribing, and health information technology initiatives) contribute to slower Medicare spending growth on physician and clinical services of 3.4 percent, down from 4.6 percent in 2014," the report said.

During the early part of the projection period, overall spending on physician services will increase more slowly than spending in other sectors. "This expectation stems from increasing cost-sharing requirements in private plans that tend to slow growth in the use of benefits," the actuaries said.

There are uncertainties in the effect that the recent Medicare Access and CHIP Reauthorization Act of 2015 legislation will have on future Medicare payments to physicians. The report noted that the growth in these payments is limited to 1% per year through 2019 under the new law. Nevertheless, physicians who participate in alternative payment models, such as accountable care organizations, medical homes, and payment bundling, are guaranteed 5% annual bonuses from 2019 to 2024.

The report does not suggest that any of these alternative payment models will lessen future cost growth.

In a CMS press conference, coauthor Gigi A. Cuckler, also from the Office of the Actuary at the CMS, explained that where CMS programs involving these new payment models have shown savings, those have been integrated into the projections. "But thus far, the research has shown a very modest impact on savings," she said. "As we continue to research these programs, and they're shown to have a lasting impact on Medicare spending and overall national health expenditures, those will be further incorporated into the report for future projections."

The actuaries declined to estimate the overall effect of the Affordable Care Act at the news conference. Cuckler noted that it was no longer possible, 5 years after the law was enacted, to estimate what health spending would have been in its absence. But the report did project that the insured share of the population would continue to increase, going from 89% in 2014 to more than 92% in 2024.

Health Aff. Published online July 28, 2015. Full text

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