Health Care Spending to Double to $4.3 Trillion by 2017; Boomers Drive Medicare

Increased use to double prescription drug spending as prices go down, generics grow

Feb. 26, 2008 – The cost of health care in the U.S. is expected to continue to outpace inflation and gobble up more of the nation’s gross domestic product (GDP), according to an analysts by the Centers for Medicare and Medicaid Services. The report published in Health Affairs says health care spending will double by 2017, from last year, reaching $4.3 trillion. By 2017 it will also be consuming 19.5 percent of the GDP.

The 10-year estimates follow last month’s report from the government that health spending in 2006 surpassed $2.1 trillion for the first time, accounting for 16.0 percent of GDP.

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“Health care is expected to consume an expanding share of the U.S. economy over the next decade, meaning policymakers, insurers, and the public collectively face some difficult decisions about the way health care is delivered and paid for,” said Centers for Medicare and Medicaid Services (CMS) economist Sean Keehan, one of the authors of the government’s annual health care projection report.

“With the implementation of the Medicare Part D benefit behind us, a focal point of the next 10 years will be the impending movement of the baby-boom generation into Medicare,” he continued.

Health care spending is expected to hit $2.2 trillion in 2007, growing on average 6.7 percent through 2017 and outpacing economic growth by about 1.9 percentage points each year, say Keehan and his fellow economists and actuaries from the CMS Office of the Actuary.

Steady health spending growth coupled with what analysts project to be somewhat lower economic growth of about 4.7 percent annually is expected to result in a gradual increase in health spending as a share of GDP.

Medicare And Medicaid

Although the outlook for national health spending growth calls for continued stability for the next 10 years, the authors note that they expect the leading edge of the baby-boom generation to begin to affect the Medicare program.

Over the next decade, a slowdown in growth in private spending is expected to be offset by accelerating growth in public-sector spending, partially attributable to the baby-boomer generation enrolling in Medicare.

The CMS analysts say that this increase in the number of Medicare enrollees is projected to contribute 2.9 percentage points to growth in Medicare spending by 2017.

By 2017, Medicare spending is expected to account for $884 billion, or just over one-fifth of all national health spending.

This is up from the projected spending level of $427 billion in 2007, when Medicare spending growth is expected to slow to 6.5 percent. The projected 2007 growth rate indicates a significant deceleration from 18.7 percent growth in 2006, when new spending associated with the Medicare prescription drug benefit was added.

Also contributing modestly to the expected slowdown from 2006 to 2007 are smaller increases in Medicare Advantage (MA) plan payments due to risk adjustments to those payments.

The CMS analysts project that growth in private health care spending will rebound to 6.3 percent in 2007 following the somewhat slow growth of 5.4 percent in 2006 that was related to the implementation of Medicare Part D. After peaking at 6.6 percent in 2009, growth in private health care spending is expected to slow through 2017 to 5.9 percent.

Medicaid spending also is expected to continue to rise at a faster rate than overall health spending during the coming decade.

Medicaid expenditures are projected to grow 8.9 percent in 2007 to $338.2 billion. Aside from the one-time transition effects of shifting prescription drug costs for those dually eligible for both Medicare and Medicaid to Medicare Part D, this rebound is also influenced by continued strong growth (above 10.0 percent) in spending for home health care and other personal care services.

Moreover, as a result of improved fiscal conditions at the time, states were expected to increase provider payment rates to hospitals and physicians in 2007 more than in recent years.

Medicaid spending in 2008 is projected to grow 6.8 percent and reach $361.2 billion. For the next decade, it is expected to grow at an average of 7.9 percent per year, reaching $717.3 billion, or 16.8 percent of national health spending, by 2017.

Prescription Drug Spending

Prescription drug spending is expected to grow 6.7 percent in 2007, driven by lower drug prices and wider use of generics. However, the CMS analysts project that drug spending will accelerate through 2017, reaching almost $515.7 billion -- more than double the $231.3 billion projected for 2007.

Healthcare Spending Hits $2.1Trillion, Growth Rate Grows in 2006, Says CMS Growth slight but more than economic growth, general inflation   See in story: > Healthcare spending by age > Report by KaiserNetwork on CMS news and reactions   Jan. 8, 2008 - In 2006, U.S. health care spending reached a total of $2.1 trillion, or $7,026 per person, up from $6,649 per person in 2005, according to a report by the Centers for Medicare & Medicaid Services (CMS). The health care spending growth accelerated slightly in 2006, increasing 6.7 percent compared to 6.5 percent in 2005, which was the slowest rate of growth since 1999. Read more...

Increases in prescription drug use are expected to drive the increase in drug spending over the next decade. Medicare Part D’s implementation in 2006 is expected to have very little impact on overall health spending growth through 2017, as per capita spending for Medicare beneficiaries is assumed to remain identical to that of the rest of the population, according to the authors.

Hospital Spending

By 2017, hospital spending will nearly double from the expected $696.7 billion in 2007 to more than $1.3 trillion. Hospital spending is expected to grow 7.5 percent in 2007, partly as a result of higher Medicaid payments. Hospital spending growth is expected to slow to 6.4 percent by 2017, as growth in the projected demand for hospital services slows in response to expected slower growth in income.

Other Highlights From The Report

Out-of-pocket spending. Consumer out-of-pocket spending for health care is expected to reach $269.3 billion and grow 5.0 percent in 2007. Growth in out-of-pocket payments is projected to gradually accelerate to 6.0 percent and reach $464.3 billion by 2017.

The analysts cite the expectation that employers and insurers will shift more health care costs to their covered populations through benefit buy-downs and increased cost sharing in response to slower projected economic growth.

Private health insurance. Private health insurance premiums per enrollee are expected to grow 6.0 percent in 2007, higher than the 5.2 percent rate in 2006, when the Medicare Part D program was introduced. The CMS analysts project that premium growth will increase to 6.9 percent by 2009 but will again slow to 5.9 percent by 2017. These trends are driven by expected growth in private health insurance benefits, as well as by cyclical fluctuations in insurers’ profit margins and administrative costs.

Physician services. Growth in total physician and clinical services spending is projected to continue slowing, reaching 5.7 percent, or $473.0 billion in 2007. For the next decade, growth in physician spending is expected to average 5.9 percent per year, down from 6.6 percent in the past 11 years.

Long-term care. Although home health spending growth is expected to slow, it is expected to remain one of the fastest-growing health sectors, climbing a projected 7.7 percent per year and reaching $119.0 billion by 2017. Medicare and Medicaid are expected to remain the primary payers in this sector and account for 84 percent of home health care spending by 2017.

Nursing home spending growth is expected to gradually accelerate from 3.5 percent in 2006 to 5.6 percent in 2017, reaching $217.5 billion with Medicaid expected to pay for about 43 percent of such care. The CMS researchers say that the baby boomers’ impact on nursing home spending is likely to be small in this projection period, since the oldest of that generation will be just 71 by 2017.

The article is available online at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.27.2.w145

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.

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