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U.S. Healthcare Spending Projected to Climb Swiftly

News  |  By Christopher Cheney  
   February 16, 2017

Healthcare spending is expected to represent 19.9% of gross domestic product by 2025, according to government economists and actuaries. It accounted for 17.8% of GDP in 2015.

By 2025, healthcare spending is projected to account for one-fifth of the country's economic activity, according to an annual report based on federal data.

National health expenditures are projected to grow "at an average annual rate of 5.6% for 2016 – 2025 and represent 19.9% of gross domestic product by 2025," according to the report published online Wednesday by Health Affairs.

Healthcare spending accounted for 17.8% of GDP in 2015.

Data for the report, "National Health Expenditure Projections, 2016-25: Price Increases, Aging Push Sector to 20 Percent of Economy," was drawn from the Centers for Medicare & Medicaid Services and the Department of Commerce.

The findings are slightly more optimistic than the analysis of last year's national health expenditure projections. In last year's report, national healthcare spending was projected to grow at a 5.8% annual rate and account for 20.1% of GDP by 2025.

One of the reasons for the modestly rosier scenario is actual and projected slower growth in medical service prices, the lead author of this year's report said Wednesday during a conference call with members of the media.

"Growth in medical prices—especially for 2016, 2017, and 2018 were a little bit slower in this year's report than they were in last year's report," said Sean Keehan, an economist in the CMS Office of the Actuary, and the report's lead author.

Price Drivers
Two primary factors are expected to be the main drivers of increased healthcare spending over the next decade, medical prices and use and intensity of services, this year's report says. Two secondary factors cited are population growth and the population's age-sex mix.

Changes in overall medical-service prices are mainly the result of economy-wide inflation and "medical-specific price inflation," according to the report, which defines medical-specific price inflation as the variation between medical and economy-wide inflation.

Inflation's Effect
From 2014 to 2016, the annual average rate of medical-specific price inflation was -0.2%, the lowest rate since 1973.

Medical-specific price inflation is expected to be a key factor in overall medical-service prices from 2020 to 2025, increasing at an annual average rate of 0.5%.

The report projects the annual average rate of overall medical-service prices to increase steadily over the next decade:

  • 1.6% this year
  • 2.4% next year and 2019
  • 2.7% from 2020 to 2025

The conclusions of the report highlight both regulatory uncertainty and continued pressure from payers to contain spending over the next decade.

The authors concede that their conclusions are based on continuation of the current regulatory framework, despite significant uncertainty about how regulatory changes such as repeal of the Patient Protection and Affordable Care Act could impact healthcare spending.

"This analysis finds that under current law and following the recent significant period of transition associated with coverage expansions, healthcare enrollment and spending trends are projected to revert to being fundamentally driven by changes in economics and demographics."

Regardless of any regulatory changes, the report concludes that pressure from payers to contain healthcare spending will continue over the next decade. "Employers, insurers, and other payers will continue to pursue strategies that seek to effectively manage the use and cost of healthcare goods and services."

Christopher Cheney is the CMO editor at HealthLeaders.

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