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TRENDSHealth Spending Projections Through 2018: Recession Effects Add Uncertainty To The Outlook
During the projection period (2008–2018), average annual growth in national health spending is projected to be 6.2 percent—2.1 percentage points faster than average annual growth in gross domestic product (GDP). The health share of GDP is anticipated to rise rapidly from 16.2 percent in 2007 to 17.6 percent in 2009, largely as a result of the recession, and then climb to 20.3 percent by 2018. Public payers are expected to become the largest source of funding for health care in 2016 and are projected to pay for more than half of all national health spending in 2018.
NATIONAL HEALTH SPENDING is projected to reach $2.4 trillion in 2008.1 Over the projection period (2008–2018), this spending is expected to increase 6.2 percent per year, on average, reaching $4.4 trillion by 2018 (Exhibits 1  and 2). Growth in gross domestic product (GDP) over the projection period is expected to average 4.1 percent per year—2.1 percentage points slower than average annual health spending growth. As a result, the health share of GDP is expected to rise from 16.2 percent in 2007 to 20.3 percent in 2018.
Largely as a result of the recession, the differences in growth rates between national health spending and GDP are expected to be the greatest in 2008 and 2009 (Exhibit 3 ).2 Growth in national health spending is projected to remain steady in 2008 at 6.1 percent, the same rate of growth as in 2007, and then to decelerate to 5.5 percent in 2009. GDP growth is projected to be 3.5 percent in 2008 and –0.2 percent in 2009. Thus, the health share of GDP is expected to increase 1.4 percentage points—about one-third of the total increase in share through 2018—in the first two years of the projection period covered by this paper.
Divergent trends in spending growth for private and public payers of health care are expected in 2008 and 2009, because of anticipated effects of the recession. The expectation of slower income growth and declining private health insurance coverage is projected to result in decelerating growth in private health spending, from 5.8 percent in 2007 to a fifteen-year low of 3.9 percent by 2009. Conversely, health spending growth by public payers is projected to accelerate from 6.4 percent in 2007 to 7.4 percent by 2009, based in part on an expectation of faster growth in Medicaid enrollment and spending (Exhibit 4 ).
In 2010, projected national health spending growth decelerates further to 4.6 percent, largely influenced by a 21 percent cut in Medicare physician payment rates called for under the statutory Sustainable Growth Rate (SGR) formula in current law. Largely as a result of this cut, Medicare spending growth is expected to slow from 8.0 percent in 2009 to 2.5 percent in 2010. Projected total public spending growth would likewise decelerate from 7.4 percent in 2009 to 5.0 percent in 2010.
Because legislative intervention has prevented cuts to Medicare physician payment rates each year from 2003 through 2009, we also project health spending based on an assumption of holding Medicare physician payment rates constant from 2010 through 2018 for the purpose of illustration. Under this scenario, projected Medicare spending growth would slow less dramatically in 2010, to 6.4 percent, or 3.9 percentage points faster than under current law. Projected growth in total national health spending in 2010 would be 5.4 percent—0.8 percentage point higher than the current-law projection (Exhibit 5
Under current law, growth in national health spending is anticipated to accelerate beginning in 2011, eventually reaching 7.2 percent in 2018. Private health spending growth is expected to rebound from 4.2 percent in 2010 to 6.1 percent by 2018 in response to projected improving economic conditions. Growth in public spending is projected to accelerate from 5.0 percent in 2010 to 8.2 percent in 2018, as the oldest baby boomers become eligible for Medicare. As projected public spending growth outpaces projected private spending growth over the period, the public share of spending is expected to exceed 50 percent by 2016 and to reach 51.3 percent by 2018. Despite the unprecedented magnitude of the Medicare rate cut for physician payments required in 2010, the ramifications for projected growth in overall national health spending and the health share of GDP over the entire projection period remain relatively small. Under the alternative scenario, in which Medicare physician payment rates are held constant, national health spending growth is projected to average 6.3 percent over the period—0.1 percentage point faster than under the current-law projection. The projected health share of GDP would be 20.5 percent—0.2 percentage point higher than under current law.
These projections are generated within a "current-law" framework that incorporates actuarial, econometric, and judgmental inputs.3 The projections for private and public spending use the economic and demographic assumptions from the 2008 Medicare Trustees report, which are updated to reflect the latest macroeconomic data.4 The Medicare projections are based primarily on the annual Medicare Trustees report and account only for the direct impacts of cuts to physician payment rates as required under the SGR system.5 The prescription drug projections reflect the Medicare Part D cost estimates and assumptions in President Bush’s fiscal year 2010 budget.6 A second set of projections are produced to reflect an alternative scenario that assumes constant Medicare physician fee schedule rates for 2010–2018. The underlying assumptions are consistent with a supplemental memorandum to the Medicare Trustees report that conducts a similar analysis.7 Projections are inherently subject to uncertainty; the degree of uncertainty grows larger with each additional projection year. Notably, the volatility of recent macroeconomic conditions and the uncertainty surrounding the length and severity of the current recession increase the uncertainty of the projections presented in this paper.8
Projected growth in medical prices represents the largest contributor to expected increases in personal health care (PHC) spending (Exhibit 6 ). Growth in these prices, as measured by the Centers for Medicare and Medicaid Services (CMS) PHC price index, is projected to be 3.0 percent in 2008 and 2.8 percent in 2009—the slowest pace for medical price growth since 1999.9 This trend is related in part to slowing input price growth associated with the recession.10 Projected medical price growth is expected to accelerate gradually to 3.8 percent by 2018, because the supply of certain health professionals—particularly registered nurses (RNs) and primary care physicians—might not keep up with demand.11 The impact of growing cost pressures on pricing might be tempered by selective contracting, which would result in smaller provider networks and lower reimbursement rates.12
Projected growth in the use of medical services is the second-largest contributor to anticipated PHC spending increases. This year’s outlook on use—including volume and intensity—reflects the expected impact of the recession. For instance, in 2008 the projected growth in use of 1.7 percent includes the effects of slower growth in filled prescriptions, physician visits, and elective hospital procedures.13 In 2009 the continued effect of the recession is expected to result in a 1.7 percent decline in the number of people with private health insurance coverage, further slowing growth in use to 1.2 percent. Despite an expected resumption of positive GDP growth beginning by 2010, growth in use is not expected to accelerate rapidly, climbing from 1.1 percent in 2010 to 1.8 percent by 2018. The effect of population growth is expected to remain minor over the projection period, accounting for an average of 0.9 percentage point of the 6.2 percent annual growth in PHC spending. The impact of aging on this growth is expected to be minor as well, and to account for just 0.4 percentage point of growth per year.14 Notably, although the oldest members of the baby-boom generation will begin to enroll in Medicare in 2011, the influx of relatively younger beneficiaries is expected to lower per enrollee Medicare spending.
Medicare. Medicare spending is projected to increase 8.1 percent in 2008, up from 7.2 percent growth in 2007, and to reach $466.0 billion (Exhibit 4  ). This expected acceleration is largely due to more rapid spending growth for hospital services, physician services, and costs associated with administering the Medicare benefit. Growth is projected to be similar in 2009 (8.0 percent). Total Medicare spending growth is projected to slow to 2.5 percent in 2010 related to the SGR-mandated 21 percent cut to physician payment rates in current law (data not shown). This cut is projected to reduce Medicare spending on physician and clinical services by 7.0 percent. In addition, because Medicare managed care payment rates—and thus spending—are directly affected by changes in fee-for-service (FFS) payment rates, the large physician payment cut will affect Medicare spending in multiple sectors. For example, Medicare hospital spending growth is projected to decelerate to 4.6 percent in 2010 from 6.8 percent in 2009 under current law (not shown), as managed care payment rates for hospital services are influenced downward in part as a result of the rate cut. From 2011 through 2018, Medicare spending growth is expected to accelerate from 6.2 percent to 8.6 percent (data not shown) under current law as a result of faster enrollment growth, as the oldest baby boomers become eligible for the program. Under the scenario in which physician payment rates are held constant from 2010 to 2018, total Medicare spending growth is projected to average 7.8 percent per year during 2011–2018—slightly faster than the 7.7 percent growth projected under current law (data not shown). These similar growth rates are the net result of lower Medicare physician payment rates under current law in each of the first four years of the period, and higher payment rates under current law from 2015 onward. Prescription drug spending is expected to be the fastest-growing component of Medicare over the projection period (10.2 percent per year, on average). Enrollment growth in Part D plans is anticipated to be faster than overall population growth as the baby-boom generation becomes eligible for Medicare and as Medicare beneficiaries move from other forms of drug coverage to Part D. As a result, the prescription drug spending share of Medicare spending is projected to increase from 10.9 percent in 2007 to 14.7 percent by 2018 (data not shown).
Medicaid.
Total Medicaid spending (federal and state combined) is projected to grow 6.9 percent in 2008, slightly faster than in 2007 (6.4 percent), and to reach $352.1 billion (Exhibit 4 By 2012, Medicaid spending growth is projected to slow to 7.8 percent (not shown) in response to improving economic conditions. However, this growth is expected to accelerate to 8.9 percent by 2018 as the proportion of relatively costly aged beneficiaries increases. Private health insurance. Spending on private health insurance benefits is expected to reach $719.6 billion and grow 5.8 percent in 2008 (not shown). Continued slow economic growth is expected to lead to a further deceleration of growth in spending for private health insurance benefits, to 4.1 percent in 2009. This trend is driven primarily by projected slower price growth and an expected higher unemployment rate that contributes to a subsequent decrease in the number of privately insured people. Growth in spending for private health insurance benefits per enrollee is projected to slow from 6.5 percent in 2007 to 6.3 percent in 2008 and 5.9 percent in 2009 (not shown).
Total growth in private health insurance premiums is projected to slow from 6.0 percent in 2007 to 5.5 percent in 2008 ($817.4 billion in spending) and then to 4.5 percent in 2009 (Exhibit 4 The difference between benefits and premiums reflects the net cost of insurance, which includes administrative expenses, changes in reserves, and profit margins. The net cost varies with the insurance underwriting cycle, or the tendency of growth in private health insurance premiums to fluctuate around the long-term trend in per enrollee medical costs.15 The net cost share of premiums, referred to as the net cost ratio, is expected to fall from 12.2 percent in 2007 to 12.0 percent in 2008, continuing a decline since 2003 (13.6 percent) that resulted from growth in benefits consistently outpacing premiums per enrollee. Growth in spending on private insurance benefits is expected to be 4.0 percent in 2010 and then accelerate through 2015 to 5.9 percent (data not shown). This acceleration reflects the expected improving economic conditions in the form of lower unemployment rates, faster income growth, and increases in the number of privately insured people. Private insurance benefits per enrollee, however, are expected to grow more slowly each year until 2012, when growth is projected to be 3.9 percent, before accelerating to 6.1 percent by 2018. This growth has tended to respond with a lag to changes in income, because it takes time for these changes to be reflected in contractual relationships between employers, insurers, and providers. Per enrollee growth in private insurance premiums is similarly expected to slow to 3.8 percent by 2012 and rebound to 6.2 percent by 2018 (data not shown). The remainder of the projection reflects a mild underwriting cycle, as the net cost ratio is expected to increase to 12.6 percent by 2010, decrease slightly to 12.5 percent by 2013, and then edge upward to 12.7 percent by 2018.16
Out-of-pocket spending.
Out-of-pocket spending is projected to grow 3.8 percent in 2008, lower than the 5.3 percent growth in 2007, and to reach $278.8 billion (Exhibit 4 The out-of-pocket share of medical spending typically declines during a recession for two reasons. First, slowing income growth tends to depress demand for services that entail out-of-pocket spending for those with differing types of insurance coverage and for the uninsured. Second, Medicaid enrollment has tended to increase in a recession. Because Medicaid has very low cost-sharing requirements, the out-of-pocket expenses of new enrollees tend to be less than when they were uninsured or had private coverage. As a result, the out-of-pocket share of PHC spending is projected to fall from 14.3 percent in 2007 to 14.0 percent in 2008 and to 13.5 percent in 2009 (data not shown). After 2009, growth in out-of-pocket spending is projected to accelerate to 2.8 percent in 2010 and to 5.7 percent by 2018 (data not shown), driven principally by the expected economic recovery. In addition, increases in the cost-sharing requirements for private health insurance are expected to continue, including a recent movement toward higher deductibles for preferred provider organization (PPO) plans.18
Prescription drugs. Prescription drug spending is expected to grow 3.5 percent in 2008, a slowdown of 1.4 percentage points from 2007, and to reach $235.4 billion (Exhibits 1 and 2). This projected deceleration is mostly related to the effects of the recession, as growth in the number of filled prescriptions slows and patients become more willing to switch from brand-name drugs to cheaper generics.19 In 2010, drug spending growth is expected to rebound to 4.5 percent and then climb to 6.6 percent by 2013, as use increases in response to projected improving economic conditions and to the effect of new indications of currently approved drugs.20 Also contributing to the accelerating growth is the expectation of faster price growth among generic drugs. One factor expected to mitigate drug spending growth is that many blockbuster brand-name drugs, including Lipitor, are expected to lose patent protection in 2011 and 2012; the availability of lower-cost generic versions of these drugs is expected to moderate spending growth in 2012 and 2013.21 From 2014 to 2018, prescription drug spending growth is anticipated to continue to accelerate, reaching 8.6 percent by 2018 (data not shown). During this period, the generic dispensing rate, which has greatly increased in recent years and dampened drug spending growth, is expected to level off. Finally, new drug approvals, especially for costly specialty drugs, are projected to exert upward pressure on the growth of drug spending.22
Hospitals.
Total hospital spending is projected to grow 7.2 percent in 2008, 0.1 percentage point slower than in 2007, and to reach $746.5 billion (Exhibits 1 In 2010, hospital spending growth is projected to reach 5.1 percent (data not shown). This slowdown is mainly related to a deceleration in public-payer hospital spending growth from 6.9 percent in 2009 to 5.5 percent in 2010 because of the direct relationship between Medicare managed care payment rates and the scheduled cut to physician payment rates in current law. In the absence of a payment cut, projected public-payer hospital spending would grow 6.1 percent in 2010. Beginning in 2011, hospital spending growth is projected to accelerate, reaching 7.0 percent by 2018. Private-payer hospital spending growth is expected to climb to 6.4 percent by 2018 in response to the expected economic recovery. Public-payer hospital spending growth is projected to accelerate more rapidly and reach 7.4 percent by 2018, largely because of the shift of the oldest baby boomers to Medicare coverage.
Physician and clinical services.
Spending for physician and clinical services is expected to grow 6.2 percent in 2008, down from 6.5 percent in 2007, and reach $508.5 billion (Exhibits 1 Under current law, spending growth in this area is expected to reach a historic low of 2.3 percent in 2010. This projection is heavily influenced by the SGR-mandated cut to Medicare physician payment rates, as well as the lagged effect of projected declines in income. If Medicare physician payment rates were to remain constant in 2010, total physician spending growth would be projected to slow to 5.0 percent in that year, the slowest growth since 1997. Because macroeconomic conditions are expected to improve, physician and clinical services spending growth is projected to accelerate, reaching 6.6 percent by 2015 before slowly decelerating to 6.2 percent by 2018 (data not shown), largely driven by expected changes in income. This longer-term expectation is also influenced by several other factors, including downward pressure on private physician spending growth resulting from the shift in the baby-boom generation from private sources of coverage to Medicare, as well as upward pressure associated with the projected shortage of primary care physicians.24 Under current law, the Medicare share of total physician and clinical spending is anticipated to increase only slightly, from 20.1 percent in 2007 to 20.7 percent in 2018 (data not shown). However, under the alternate scenario where Medicare physician payment rates are held constant after 2009, the share of physician and clinical services spending paid for by Medicare would be expected to increase more rapidly, reaching 23.4 percent by 2018.
Long-term care.
Home health care spending is projected to grow 9.1 percent in 2008, down from 11.3 percent growth in 2007, and to reach $64.4 billion (Exhibits 1 For much of the program’s history, Medicare has been the dominant payer of home health services. However, Medicaid is projected to become the largest payer of such services by 2010, following nearly a decade of double-digit growth associated with shifting preferences away from institutional care toward home and community-based settings. Although Medicaid spending growth for home health is expected to slow as the shift toward home-based care continues at a lesser pace, it is still expected to remain robust, averaging 11.4 percent per year over the projection period (data not shown).
Nursing home care spending is projected to grow 4.6 percent in 2008, 0.2 percentage point lower than in 2007, and to reach $137.4 billion (Exhibits 1
The outlook for health spending during these difficult economic times is laden with formidable challenges for the public and private sectors. The recession and associated uncertainty concerning its length and severity has wide-reaching implications. As observed during past recessions, the projections presented here reflect increasing numbers of uninsured people, fewer people with private health insurance coverage, and increased spending by states and the federal government to care for a larger Medicaid population. At the same time, they reveal an expected decrease in nominal GDP for 2009—the first nominal decrease since 1949—and the largest one-year increase in the health share of GDP in history.25 Finally, as the baby-boom generation’s transition into Medicare grows closer, the increased and sustained demands upon public program financing that used to seem so far away gradually becomes a reality. The recession may cause the projected Medicare Hospital Insurance Trust Fund exhaustion date to be one to three years closer than expected a year ago.26 With these mounting pressures and increasing calls for reform, policymakers and their constituents will face tough decisions regarding the future of our health care system.
The authors are with the Office of the Actuary, Centers for Medicare and Medicaid Services, in Baltimore, Maryland. Andrea Sisko (DNHS{at}cms.hhs.gov) is an economist. Christopher Truffer is an actuary; Sheila Smith, Sean Keehan, and Jonathan Cylus, economists; John Poisal, deputy director; and Kent Clemens and Joseph Lizonitz, actuaries. The opinions expressed here are the authors’ and not necessarily those of the Centers for Medicare and Medicaid Services. The authors thank Richard Foster, Stephen Heffler, Aaron Catlin, Cathy Curtis, Mark Freeland, and Micah Hartman.
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Factors Contributing To Growth
