Healthcare Spending Accelerating in U.S. as Prices, Incomes Rise

If the current pace holds, CMS actuaries project healthcare spending will reach $5.7 trillion by 2026 and consume nearly 20% of the gross domestic product.

Healthcare spending is projected to eat an even bigger slice of the U.S. economy in the next eight years, according to projections released today by the Centers for Medicare & Medicaid Services.

CMS' Office of the Actuary projects an average annual rate of national health spending growth of 5.5% for 2017–26, representing about $5.7 trillion, and outpacing average projected growth in gross domestic product by 1 percentage point.

The key drivers for spending growth include: growth in disposable personal income; increased prices for medical goods and services; and aging Baby Boomers’ ongoing shift from private health plans to Medicare, CMS said.

As a result, the healthcare share of the economy is projected to climb to 19.7% by 2026—up from 17.9% in 2016, or $3.3 trillion. CMS said the projections rely on the current-law framework and assume no legislative changes over the decade.

The projections were published today in Health Affairs.

"Something that really stands out is how much these projections are really influenced by fundamental demographic and economic shifts," Gigi Cuckler, an economist at CMS and lead author of the study said Tuesday in a media conference call.

"It’s very clear that the aging of the population has a significant influence on Medicare enrollment and shifts out of private health insurance. And it is also very clear that the growth in income, particularly disposable personal income, has a substantial influence, particularly on projected private health insurance and out-of-pocket spending," she said.

Along with the aging demographic, price growth for medical goods and services is also expected to be a significant factor for spending growth, and is projected to increase from historically low rates in 2014–16 of 1.1% per year, and average 2.5% per year for 2017–26.

Spending for hospital care is projected to increase from $970 billion in 2018 to $1.8 trillion in 2026, while spending for physician and clinical services is expected to climb from $734 billion to $1.1 trillion over the same eight years.

Prescription drugs will see the fastest average annual spending growth over the eight years, at 6.3% per year, growing from $360 billion in 2018 to $605 billion in 2026, largely because of increased spending on specialty drugs.

The insured share of the population is expected to decline slightly from 91.1% in 2016 to 89.3% in 2026, due to the repeal of the Affordable Care Act’s individual mandate.

Here is a chronological look at projected trends:

2018

National health spending growth is projected to increase to 5.3%, up from 4.6% in 2017.
Medicaid spending growth is projected to increase 4 percentage points, at a projected rate of 6.9%, due to the growth in health insurance spending as a result of smaller risk-mitigation recovery payments from the previous year.
Private health insurance spending growth is projected to decelerate to 4.8%, down from 5.6% in 2017, due to slower growth in the net cost of insurance in the Marketplace.
Prescription drug spending growth is anticipated to accelerate from 2.9% in 2017 to 6.6% in 2018, based on the expectation that the dollar value of drugs losing patent protection is less than in previous years.

2019–20

National health spending growth is projected to average 5.5%, a slight acceleration from 5.3% in 2018, as a result of faster projected average growth in Medicare spending not fully offset by slower average growth in private healthcare insurance spending.
Compared to 2018, Medicare spending is projected to grow 2 percentage points faster on average at 8%, reflecting accelerated physician incentive payments under MACRA, and projected growth in the use and intensity of Medicare goods and services.
Private health insurance spending is projected to slow on average to 4.1%, from 4.8 percent in 2018, due in part to the repeal of the individual mandate.
The number of uninsured people is projected to increase to 32.7 million by 2020, rising from 30 million projected for 2018.

2021–26

National health expenditure growth is projected to accelerate and average 5.7%, up from 5.5% projected for 2019–20.
Average Medicare and Medicaid spending growth (7.7% and 6.1%, respectively) will continue to outpace that of private health insurance (4.7%) due to the aging of the population, including continued strong enrollment growth.
In 2026, 47% of national health spending is projected to be sponsored by federal, state, and local governments, up from 45% in 2016. This reflects the shifting demographics including the continued transition of Baby Boomers to Medicare.
The projected share of health spending by businesses, households, and other private revenues is expected to fall 2 percentage points, from 55% in 2016 to 53% in 2026.