Healthcare Costs Projected to Be Almost 20% of US GDP by 2027

Ken Terry

February 21, 2019

National health expenditures (NHE) are expected to grow 5.5% per year, on average, from 2018 through 2027, according to the latest report from the actuaries of the Centers for Medicare & Medicaid Services (CMS), published February 20 in Health Affairs.

This is faster than the average growth rate of NHE following the Great Recession (2008–2013) and during the Affordable Care Act's major coverage expansions (2014–2016), but slower than the average annual growth rate of 7.3% from 1990 to 2007.

Healthcare's share of the gross domestic product (GDP) is projected to rise from 17.9% in 2017 to 19.4% in 2027. This is a somewhat slower increase than that predicted 2 years ago. However, the projected NHE of nearly $6 trillion in 2027 is 63% higher than the estimated spending of $3.65 trillion in 2018.

Economic and demographic factors, including higher incomes and aging, will be the primary drivers of the accelerated growth in NHE, the CMS actuaries' report predicts. For example, the aging of the population will result in a 7.4% average annual increase in Medicare spending, compared to 5.5% for Medicaid and 4.8% for private health insurance.

Much of the difference between Medicare and private insurance spending will be related to the rapid increase in Medicare enrollment as baby boomers reach 65. Medicare enrollment growth will peak at 2.9% in 2019 and will gradually decline through 2027.

The acceleration in the growth of Medicare spending, the report notes, will also be driven partly by the "growth in use and intensity of covered services that is consistent with the rates observed during Medicare's long-term history."

While rising utilization and the increase in intensity of services will account for about 30% of the overall increase in personal healthcare spending, higher prices will account for nearly half of cost growth during the projection period, the report says. The rest is attributed to demographic changes. Prices are expected to increase 2.5% from 2018 to 2027, compared to 1.1% from 2014 to 2017.

Higher Demand, Higher Wages

Prices are predicted to grow an average 2.8% per year for prescription drugs, 2.6% for hospital services, and 1.8% for physician and clinical services, CMS officials revealed at a news conference held Wednesday. Physician price growth will accelerate from 2020 to 2027, according to the CMS report. These higher prices will result partly from increased wages and other expenses.

"Wages are expected to increase as a result of the supply of physicians not being able to meet expected increases in demand for care connected with the aging population," the report states. In addition, the increased productivity made possible by the hiring of nonphysician clinicians in many practices will diminish because of state licensing restrictions, the authors predict.

At the news conference, John Poisal, deputy director of the National Health Statistics Group, CMS Office of the Actuary, added another insight to this projection. As the population continues to age and the demand for medical services increases, he said, the competition between physicians, hospitals, and other kinds of providers for nurses and other professionals will lead to faster wage increases.

Insured Rate to Remain Stable

The number of uninsured people, which was 29.9 million in 2018, is expected to rise to 31.2 million in 2019 and 36.2 million in 2027. The report attributes the short-term increase in the uninsured to the effective repeal of the individual mandate in the Affordable Care Act.

However, because of population growth, there will not be much change in the percentage of the population that is insured. In 2027, 89.7% of the population will be covered, just a bit less than the 90.9% who were insured in 2017, the report says.

Private insurance spending will grow 4.8% annually on average, according to the projections. Consumers' out-of-pocket spending will also grow 4.8% per year and will represent 9.8% of total spending by 2027, down from 10.5% in 2017.

The Medicaid expansions scheduled in five states this year will result in the first acceleration in Medicaid spending since 2014, according to the report, as cost growth rises from 2.2% in 2018 to 4.8% in 2019. Medicaid spending growth is expected to average 6% per year from 2020 through 2027, as the program's enrollment mix tilts toward "more expensive aged and disabled enrollees."

Despite the differences in projected enrollment growth, average annual increase in spending per enrollee is expected to be similar across the major payers: 4.7% for Medicare, 4.1% for Medicaid, and 4.6% for private insurance.

Average annual spending on prescription drugs is projected to grow 5.6%, mostly because of faster growth in utilization. Among the factors in this increase, the report states, are efforts by payers and providers to encourage better medication adherence among the chronically ill.

Hospital spending growth is also expected to average 5.6% per year. In 2019, this reflects higher Medicare payment updates and the Medicaid expansion in new states. From 2020 onward, hospital spending growth will accelerate, hitting 6.1% in 2019. Hospital price growth will also accelerate, partly because of wage increases.

Responding to a question about how the efforts of public and private payers to control costs were factored into the projections, Poisal said those were all considered. Coauthor Andrea Sisko, PhD, noted that the report doesn't reflect judgments on the impact of specific programs or policies.

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