Update: This post includes a new chart collection published August 11, 2015
Health spending in the U.S. has grown at historically low levels since 2008, likely due to a combination of the economic downturn and slow recovery, as well as structural changes to the health system, such as higher deductibles in private plans and lower Medicare and Medicaid payments to providers. This slow growth continued through 2013, the most recent year for which historical spending data is available, when health costs grew at just 3.6%.
Projections published on Health Affairs by the Centers for Medicare and Medicaid Services (CMS), however, suggest that health spending growth is picking back up. The report estimates that national health spending – which includes all health expenditures by private companies, public programs, and individuals – will have grown at 5.5% in 2014 and 5.3% in 2015, to a total of $3.2 trillion by the end of this year. CMS estimates that, on average, health spending will grow at an average of 5.8% per year through 2024, eventually rising to a total of $5.4 trillion or 19.6% of GDP.
The report points to the rebounding economy, insurance expansion provisions of the Affordable Care Act (ACA), and new high-priced prescription drugs as the main factors leading to spending growth in 2014 and 2015. The insurance coverage gains in 2014, and to a lesser extent in 2015, have allowed more people to have access to health care, which will likely have an upward effect on overall spending. The report also points to ACA provisions that help contain spending, such as adjustments to Medicare payments and a tax on high-cost employer-sponsored plans that is scheduled to take effect in 2018.
New specialty drugs are having an upward effect on spending, the CMS report says, echoing other analyses by PwC, Express Scripts and IMS Health. In 2014, pharmaceutical spending is estimated to have grown 12.6%, but CMS projects that growth in drug spending will decelerate to 7.6% in 2015 and 6.6% in 2024.
“Prescription drug spending shifted more toward specialty drugs in 2014, with the introduction of new drugs to treat conditions such as hepatitis C and cancer. This trend is expected to continue as research and development is increasingly targeted toward specialty drugs”
CMS, National Health Expenditure Projections, 2014–24
This pickup in spending in 2014 and 2015 is consistent with spending estimates from the Census Bureau’s Quarterly Services Survey (QSS), which publishes current spending estimates, but only for services (like physician visits and hospital stays), and does not include spending on other health expenses like pharmaceuticals or medical devices. The QSS estimates put health services spending growth in the first quarter of 2015 at a 5-year high.
Per capita out-of-pocket spending is projected to have dropped in 2014 for hospital care and physician services, by -8.7% and -4.0% respectively. However, out-of-pocket spending on prescription drugs is expected to have grown by 2.1% on a per capita basis in 2014. Overall, spending on prescription drugs is projected to have grown much more rapidly in 2014 (11.6% on a per capita basis), but most of these new costs are expected to be covered by insurance.
It is worth noting that last year’s CMS projections assumed the Sustainable Growth Rate (SGR) formula would not have occurred, and therefore assumed that – rather than dropping by double digits — physician fees would grow modestly over the next decade. The estimates released today similarly do not include the effects of SGR, which was repealed by the Medicare Access and CHIP Reauthorization Act of 2015, but now account for bonus programs that will be newly instated as a result of the Reauthorization Act. The report says that the “net result of these bonus programs will be faster growth in Medicare physician payments.”
Exerting downward pressure on health spending growth rates are the trends toward higher deductibles and narrower provider networks in private plans, according to the CMS report. Rising cost sharing in employer plans has similarly been cited by PwC and others as one of the key factors moderating spending growth. These changes in private coverage, along with changes in Medicare payment policy, could keep spending growth moderate over the next decade.
“Ultimately, these longer-lasting factors result in relatively modest projected health spending growth over the next decade, averaging close to 6 percent per year (compared to the average annual growth of about 9 percent over the three decades prior to the recession), even during a period when the uninsured population is expected to decline by almost eighteen million.”
CMS, National Health Expenditure Projections, 2014–24
Of course, long-run trends are harder to predict, and this is particularly true in a time when the health system is changing rapidly. When CMS published the 2005 baseline projections (in 2006), health spending was then expected to reach more than $3.5 trillion by 2013 and over $4 trillion by 2015. Actual health spending has been much lower, at $2.9 trillion in 2013, and is now expected to reach $3.2 trillion by the end of 2015. Part of that difference is likely due to policy changes in the Affordable Care Act, such as Medicare cost reductions, that were not anticipated in 2006.
In the short-term, the CMS estimates and those of the Census Bureau suggest that the recent period of historically low health spending growth is coming to a close, though growth rates are still not expected to reach the double-digit levels of years past.