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Analysis

Healthcare Spending at 20% of GDP? That's an Economy-Wide Problem

By John Commins  
   September 19, 2018

It's not clear yet if initiatives to reduce healthcare spending will provide enough savings to bend the cost curve, which is expected to increase by about 5.5% annually over the next decade.

Continued growth in U.S. healthcare spending to care for an aging population is having a ripple effect across the economy, straining budgets and dampening growth in businesses and households, according to a new report from Moody's Investors Service.

"That has consequences for the U.S. economy as a whole," Moody's Assistant Vice President Rebecca Karnovitz says.

"Healthcare supports the economy through output and employment, but it is increasingly crowding out other productive investments such as infrastructure and education, and that could weigh on U.S. growth potential going forward," she says.

The United States spends about twice as much on healthcare as any other industrialized nation. Healthcare spending accounted for 18% of the nation's GDP in 2016, about $3.3 trillion, and businesses and households accounted for about half of that spending. Medicare and Medicaid already account for about 25% of federal government spending, and those numbers are expected to rise as baby boomers continue to age.

Centers for Medicare & Services actuaries project that national health expenditure growth will average 5.5% annually through 2026. That growth will easily outpace GDP growth over the same period, and healthcare spending is expected to consume close to 20% of the GDP by 2026.

Karnovitz says it's not clear if initiatives such as population health or value-based care will provide enough savings to bend the cost curve.

"It's very much a question mark. Even in the short term, it's a very, very slow shift," she says.

"If you look at the Medicare program, the first step is a transitional period where the government is essentially adjusting to payments based on their own criteria," she says. "In some cases they are giving providers bonuses and in other cases they are dinging providers for not meeting the value criteria established."

With no macro-economic fix for stemming healthcare cost growth, Karnovitz says businesses and individual households, are taking action on their own.

"Employers are following in the government's footsteps," she says. "We are seeing businesses offering employees plans with high-performance narrow networks with providers that have agreed to provide high-quality care at a reduced price, enabling business to offer plans with lower premiums but with high quality care."

"On the consumer levels, they don't have very much leverage, but we are seeing they are shifting away from high-cost settings to lower alternatives such as urgent care centers, and telehealth, in an attempt to reduce their expense," she says.

"Employer plans have become less generous as they resort to using high-deductible plans to shield their bottom lines from the high costs," she says. 

Providers are adapting to the changing environment with a number of strategies, including consolidations, changing service delivery models and coordinating care along value-based networks to better capture revenues across the continuum as profit margins get squeezed.

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.


KEY TAKEAWAYS

Healthcare spending will consume 20% of the GDP by 2026.

The 5.5% projected annual growth will outpace the overall economy, and strain budgets for government, business and consumers.

Healthcare spending diverts money away from education, infrastructure, and other vital investments.


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