Healthcare Spending Accelerating, 19.7% of Economy by 2026

Marcia Frellick

February 14, 2018

By 2026, healthcare is projected to make up 19.7% of the US economy, up from 17.9% in 2016, according to a report released today by the Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS).

Spending is projected to be $5.7 trillion by 2026, up from $3.5 trillion now. CMS projects that federal, state, and local governments will be financing 47% of that spending, up from 45% in 2016, partly related to the aging of the population.

The report, published online in Health Affairs by Gigi Cuckler, an economist in the Office of the Actuary in Baltimore, Maryland, and colleagues projects an average annual growth rate in health spending of 5.5% through 2026, which would outpace average projected growth in gross domestic product (GDP) by 1 percentage point. GDP is expected to grow 4.5% per year in that period.

Authors explained in a conference call with reporters Wednesday that of that 5.5% growth half a percentage point comes from personal healthcare spending, 2.5 percentage points from higher prices, 1.7 percentage points from changes in healthcare use, and 0.9 percentage points from changes in population.

CMS Administrator Seema Verma said in a statement, "This is yet another call to action for CMS to increase market competition and consumer choice within our programs to help control costs and ensure that our programs are available for future generations."

Reasons for Growth

Among the main drivers of growth are a wave of aging baby boomers enrolling in Medicare over the period and growth in the prices of medical goods and services.

Medicare is projected to have the largest annual growth among major payers, at an average of 7.4%.

CMS projects Medicaid will average 5.8% annual growth over 2017-2026, a slowdown from the 8.3% rise from 2014-2016, when most of the Affordable Care Act's expansion happened.

The authors give this historical perspective for the overall 5.5% annual spending increase: "While this projected average annual growth rate is more modest than the 7.3% rate observed over the longer-term history before the last recession (1990-2007), it is more rapid than had been experienced in 2008-2016 (4.2%)."

Prices for prescription drugs will lead the way in higher costs for products and services with increases of 6.3% per year, largely due to the rise in expensive specialty drugs, the authors write.

Drug Rebates Will Level Off

In addition, manufacturers' rebates for prescription drugs, which helped reduce spending on drugs in 2017, are expected to increase less rapidly and level off by the end of the projection window, contributing to the increase in costs from $338.1 billion in 2017 to $604.8 billion in 2026.

Hospital spending is expected to mirror the overall increase in healthcare spending over the projection period, at 5.5% per year.

Andrea Sisko, a coauthor of the report, told reporters that in 2017 hospital spending is expected to have reached $1.1 trillion and to have grown 4.6%, which is similar to the growth of 4.7% in 2016.

Cuckler noted that the growth in 2017 of more high-deductible plans has slowed private insurance spending, "which in turn also results in a slowdown in overall physician and clinical services projected growth to 5% in 2017 from 5.4% in 2016. By 2018, however, we are projecting that prices for physician and clinical services will increase, largely due to increases in overall economy-wide inflation but also due to increases in input prices, in particular healthcare wages.

"However, even with the increases in prices projected for 2018 we only project a modest increase in physician and clinical services from 5.0 % in 2017 to 5.1% in 2018," she said.

Numbers of Insured Expected to Dip

The number of Americans insured is expected to decrease from 91.1% in 2016 to 89.3% in 2026, attributable in large part to the lack of penalties for being uninsured, which ended with the repeal of the personal mandate.

The authors add, "The trend is also influenced by economic factors, such as the impact of growth in GDP and employment on private health insurance enrollment."

The effect on the switch to value-based care is less clear in these projections, Cuckler said.

"We're monitoring these new payment models. However, it's still too early to tell some of the longer-term impacts for many of them."

Health Affairs. Published online February 14, 2018. Abstract

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