Health Spending Growth to Average 5.5% Annually Through 2027

An aging demographic, a strong economy driving a tight job market, and increases in the costs of medical goods and services are key reasons for spending growth.

National health expenditure growth is expected to average 5.5% annually through 2027, reaching nearly $6 trillion and consuming nearly 20% of the economy by then, according to federal actuaries.

The projections, issued Wednesday by the independent Office of the Actuary at the Centers for Medicare & Medicaid Services and published in Health Affairs, anticipate that growth in national health spending will outpace projected growth in Gross Domestic Product by 0.8 percentage points over the coming decade.

Because of that, the actuaries project that healthcare's share of the GDP to rise from 17.9% in 2017 to 19.4% by 2027.

"Long observed, key economic and demographic factors fundamental to the health sector are anticipated to be the major drivers of healthcare spending and coverage trends over the projection period," study lead author Andrea Sisko, an economist for the National Health Statistics Group, said Wednesday at a media teleconference.

Those key drivers include: an aging baby boomer demographic transitioning to Medicare; continued income and employment growth; and a 2.5% increase in prices for medical goods and services through 2027, which is more than twice the 1.1% rate of growth between 2014-2017.

Local, state, and federal governments are projected to pay for 47% of national healthcare spending, compared with 45% in 2017.

"This increases entirely accounted for by an increase in the federal government's share, which largely reflects faster growth in Medicare spending as the baby boom generation continues to transition into the program," Sisko said.

Owing to higher projected enrollment growth, Medicare's 7.4% average annual spending growth is expected to exceed that of Medicaid (5.5%) and private health insurance (4.8%).

"The differences in enrollment growth across the three coverage type primarily explain the differences in projected average annual growth," Sisko said.

"The contrast between the Medicare and private health insurance growth rate both for spending an enrollment is largely explained by the continued shift of the baby boom generation into Medicare. The average annual per enrollee growth rates across the payers are otherwise largely similar," she said.

Also among the projections:

• Hospital spending growth will average 5.6% through 2027. This includes a projected acceleration in 2019, to 5.1% from 4.4% in 2018, owing to faster expected growth in both Medicare and Medicaid, but slower projected growth in private health insurance as enrollment declines slightly due to the repeal of the individual mandate.
  
  For the remainder of the decade, hospital spending growth is projected to average 5.7%, with faster growth anticipated for all payers but led by Medicare and with the expectation of  higher growth in wages reflecting tighter labor markets for hospital employees.
   
• Physician and clinical services spending will grow an average of 5.4% per year over through 2027. This includes faster growth in prices over 2020-2027 for physician and clinical services due to anticipated rising wage growth related to increased demand from the aging population.
   
• Net health insurance enrollment gains across all sources are generally expected to keep pace with population growth with the insured share of the population going from 91% in 2017 to 89.7% in 2027.
   
• With Medicaid's recent expansion in Idaho, Maine, Nebraska, Utah, and Virginia, spending growth is then projected to average 5.5% for 2020 through 2027, owing to an older, sicker enrollment mix.
   
• Private health insurance spending growth is projected to average 4.8%, the slowest among the major payers, due to slow enrollment growth as baby-boomers transition to Medicare.
   
• Out-of-pocket expenditures are projected to grow at an average rate of 4.8% through 2027 and to represent 9.8% of total spending by 2027, a decrease from 10.5% in 2017.
   
• Accelerated drug spending growth of 4.6% is expected in 2019 because of higher use of new and existing drugs. Through 2027, spending growth is expected to average 6.1%.