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Medicare Actuaries: U.S. Healthcare Spending to Soar to $5.631 Trillion and 20.1 Percent of GDP in 2025

July 18, 2016
by Mark Hagland
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The Medicare actuaries predict that annual U.S. healthcare spending will reach $5.631 trillion by 2025

In their July issue, the editors of Health Affairs published the latest estimates of U.S. healthcare spending, developed and revealed by the actuaries of the federal Medicare program. In an article entitled “National Health Expenditure Projections, 2015-25: Economy, Prices, and Aging Expected To Shape Spending and Enrollment,” the authors (Sean P. Keehan, John A. Poisal, Gigi A. Cuckler, Andrea M. Sisko, Sheila D. Smith, Andrew J. Madison, Devin A. Stone, Christian J. Wolfe, and Joseph M. Lizonitz), predicted that the percentage of the gross domestic product (GDP) spent on healthcare every year across the U.S. healthcare system would grow from 17.5 percent in 2014 to 20.1 percent in 2025 with total spending rising from $3.3013 trillion in 2014 to $5.631 trillion in 2025. That figure adds to the estimates that the Medicare actuaries had predicted in October 2014; back then, the actuaries predicted that annual healthcare spending would reach $5.1588 trillion in 2023, and 19.3 percent of the nation’s gross domestic product.

As the actuaries noted in their report, “Following the initial effects of the Affordable Care Act (ACA) on health care spending and insurance coverage, increases in economic growth, faster growth in medical prices, and population aging are expected to be the primary drivers of national health spending and coverage trends over the next decade. Growth in nominal (not inflation adjusted) national health expenditures is projected to average 5.8 percent for the period 2015–25, outpacing growth in the gross domestic product (GDP) by 1.3 percentage points. As a result, the health share of the economy is expected to climb from 17.5 percent in 2014 to 20.1 percent in 2025.”

Thus, though 5.8 percent overall U.S. healthcare inflation is not high compared to historical healthcare inflation rates (during 2007-2009, the rate of inflation was nearly 8 percent), it is higher than it was in the first few years following the passage of the ACA, when passage of that legislation measurably lowered the curve of healthcare inflation.

As the authors write, “The expectation for 2017–19 is for health spending growth to accelerate somewhat (averaging 5.7 percent), in part as a result of the effect of faster growth in health care prices. In addition, growth in Medicare spending is also projected to accelerate (averaging 6.7 percent), because members of the baby-boom generation will continue to age into that federal program and because existing beneficiaries are expected to use services more often than in the recent past. Over the same three-year time frame, Medicaid spending growth is expected to average 5.6 percent, as aged and disabled beneficiaries, who tend to require relatively more expensive care than those who are younger and nondisabled, represent an increasingly higher share of total beneficiaries.1 Lastly, private health insurance spending growth is expected to average 5.6 percent—its fastest rate for any subperiod examined in the projection period.”

As the authors note, “That growth rate is largely related to rising disposable personal incomes, as well as the continued use of high-cost specialty drugs and faster growth in drug prices. Meanwhile, they state that, “During the latter half of the projection period (2020–25), average annual national health spending growth is expected to be at its highest rate for the period (6.0 percent) but to remain below the average annual growth observed over the twenty-year period preceding the 2007–09 recession (nearly 8 percent).”

One thing that is very clear: federal and state government pressures on reimbursement have been driving down inflation in both the hospital and physician practice sectors of U.S. healthcare. Indeed, say the Medicare actuaries, “Growth in hospital prices, one of the key underlying drivers of overall hospital spending growth, decelerated from 1.3 percent in 2014 to just 0.9 percent in 2015, which is the slowest rate of price growth since 1998.8 This deceleration was driven primarily by slower growth in payments by Medicare and Medicaid. After 2015, hospital price growth is projected to accelerate, reaching 2.8 percent by 2019, because of an expectation of higher growth in input costs for hospital services—especially labor compensation, reflecting both expected increases in economywide wages and increasing competition for hospital employees.15 In the second half of the projection period, hospital prices are anticipated to continue to grow at about 3 percent per year.”

And with regard to physician reimbursement, they write, “Despite expanded insurance coverage provided by the Marketplaces, growth in private health insurance spending on physician and clinical services is tempered somewhat over the projection period (averaging 4.9 percent in 2015–25) by the continued growth of high-deductible health plans, which are estimated to account for nearly one in four employer health plans in 2015, up from one in five in 2014.7 Research has found that moving into high-deductible health plans or being subject to other increases in cost sharing tends to have a disproportionate impact on the use of physician and clinical services, such as preventive care.” What’s more, they say, “Increases in multiple types of cost sharing (including benefit-design changes, higher copayments, and higher deductibles) are expected to continue throughout the projection period and will act to limit the growth in the use of physician and clinical services. These increases in cost sharing are anticipated to contribute to an acceleration in the growth of out-of-pocket spending in this category, with projected average annual growth of 5.4 percent for 2020–25.”