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Health Spending to Double in a Decade

By John Reichard, CQ HealthBeat Editor

February 26, 2008 -- New projections by federal analysts show that health spending in the United States will double by 2017, even though the arrival of baby boomers in the Medicare and Medicaid program won't have much of an impact on health care outlays by then. The single biggest factor driving spending growth during the period is price growth, according to the study by economists at the Centers for Medicare and Medicaid Services (CMS).

U.S. health spending will grow 6.7 percent annually between 2007 and 2017, almost three times the yearly general inflation rate of 2.4 percent, the study said. And with the economy projected to grow at a slower yearly rate of 4.9 percent, health care will continue its pattern of consuming a bigger share of the Gross Domestic Product (GDP). The study pegs its share of GDP in 2007 at 16.3 percent—up from 16.0 percent in 2006—rising to 19.5 percent of GDP in 2017, or $4.3 trillion.

Perhaps a more realistic 2017 estimate is 19.7 percent of GDP; the analysis assumes politically unrealistic cuts in Medicare payments to doctors will go into effect as now scheduled. Assuming no cuts would occur over that period and payments stayed flat, health care's share of GDP would climb the added two-tenths of a percent, CMS economists said.

"This projection of health care spending reminds us that we need to accelerate our efforts to improve our health care delivery system to make sure that Medicare and Medicaid are sustainable for future generations of beneficiaries and taxpayers," Acting CMS Administrator Kerry Weems said.

Spending growth on publicly funded health care programs such as Medicare and Medicaid is expected to accelerate over the 10-year period, while that of the private sector is expected to slow down.

Medicare spending jumped 18.7 percent in 2006 with the start of the program's prescription drug benefit but in 2007 that growth rate is expected to have slowed to 6.5 percent once final spending calculations are made for the year.

"After 2007, Medicare spending growth is anticipated to rebound, then accelerate to a greater degree in the last half of the projection period, driven by higher growth in Medicare enrollment" said the CMS analysis, posted Tuesday on the Web site of the policy journal Health Affairs. "Medicare spending is expected to account for just over one-fifth [20.7 percent] of national health spending by 2017."

But despite the acceleration, that's not a lot more than the 19 percent Medicare now makes up of national health spending. "It's not going to create a huge jump, at least not in the [next] 10 years," said Sean P. Keehan, a senior economist at CMS. Medicaid's share of national health spending meanwhile will rise from 14.8 percent in 2006 to 16.8 percent in 2017. Medicaid spending is expected to grow at an average rate of 7.9 percent per year during the projection period, with home care spending in the program among the fastest growing spending categories. A trend toward caring for frail Medicaid patients outside of nursing homes and in their homes is expected to fuel that growth.

CMS Actuary Richard Foster said in a press briefing Monday that the arrival of baby boomers won't have a big impact on Medicare and Medicaid over the next decade. Yearly enrollment growth in Medicare will rise from about one percent now to three percent near the end of the projection period but baby boomer enrollees will be relatively young at that point. Thus their impact will be "relatively modest," he said. But "after age 75 health care costs begin taking off quickly," he said. "Watch out for the next 10 years."

The main factors driving spending growth during the projection period "are medical prices and utilization, followed by smaller impacts from population growth and the age–sex mix," the study says. "In 2008 and beyond, medical price growth is anticipated to rebound" from a slight downturn in 2007. "For the 2012–2017 period, price growth is expected to account for 3.8 percentage point of the 6.7 percent growth" in yearly spending growth on health care services, the study found.

CMS economists said at Monday's briefing that prescription drug prices will rise an average of 3.7 percent per year during the study period, while hospital price increases will average 3.6 percent yearly. The prices doctors charge for care will rise 4 percent yearly on average, they added. Much of the increase in the prices of the components that make up health care stems from rising compensation for those who deliver care, the economists said.

The growth in private health spending, which includes out-of-pocket and private health insurance spending, is expected to peak in 2009 at a rate of 6.6 percent, then slow through 2017 because of slower economic growth. Hospital spending growth is expected to accelerate from 7.0 percent in 2006 to 7.5 percent in 2007, partly because of higher Medicaid payment rates. But hospital spending growth will decline slightly after that because of slowing growth in demand for hospital services, according to the federal forecasters.

Prescription drug spending growth in 2007 was an estimated 6.7 percent, down from 8.5 percent in 2006. "For 2008 through 2017, prescription drug spending is projected to accelerate due in part to the projected leveling off of growth in the generic dispensing rate," according to the CMS analysis. The Medicare drug benefit "is expected to have very little impact on total national health expenditure growth through 2017, as per capita spending growth for Medicare beneficiaries is expected to be identical to that of the rest of the population."

Nursing home spending growth is forecast to increase to 3.8 percent in 2007, then accelerate to an average annual growth rate of 5.3 percent through 2017.

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