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In the Weeds: Peering More Closely at Those Long-Term Health Spending Projections

FEBRUARY 22, 2006 -- The health care spending projections unveiled Wednesday by government economists are mostly unspectacular—but are a testament to the way that unspectacular increases can produce an eye-catching result if they persist over time.

For the most part, yearly percentage increases in various types of health spending are well shy of double-digit figures. But even so, health care will consume 20 percent of the gross domestic product a decade from now, up from 16 percent, according to projections released Wednesday by the Centers for Medicare and Medicaid Services.

"The relatively stable trends we expect through 2015 likely obscure dramatic changes," noted the analysts in a study posted on the Web by the policy journal Health Affairs. Those changes include the rapid growth of Medicare and Medicaid, and a health care economy in which the government's share of health care spending rises to about half of total health outlays, owing in part to the new Medicare drug benefit.

Here's a closer look at the estimates prepared by the National Health Statistics Group in the CMS Office of the Actuary.

After annual Medicare spending increases 25.2 percent in 2006 with the start of the drug benefit, the annual growth rate will slow to 5.4 percent in 2007 with lower increases in managed care payments. After those ups and downs, the growth rate is expected to even out at an average of 7.5 percent between 2008 and 2015. The projected growth rate likely underestimates actual spending increases, however, because it bases estimates on current law calling for a series of cuts in physician payment. Those cuts aren't likely to be made.

Home care is one of the hot spots in Medicare spending growth but is not a big enough part of the program to have a significant impact on the overall pace of Medicare spending growth. The annual increase for home health care spending in Medicare is projected to slow to 15.3 percent in 2005 (the last year in the study for which data are complete is 2004), down from 19 percent growth in 2004. The yearly growth in Medicare spending for home care will top 10 percent in 2006, according to the analysis.

But annual spending growth will cool off to 6.9 percent for the period 2007 to 2015. An expected shift to managed care in Medicare in part will account for slower home care spending growth, the CMS study said.

The study estimated that combined federal and state spending on Medicaid grew 7.7. percent in 2005, the fourth year in a row in which the growth rate declined. It calculated that enrollment growth in the program fell from 4.2 percent in 2004 to 2.1 percent in 2005 thanks mainly to the improving economy.

In 2006, the analysts calculate that Medicaid spending will rise only 1.5 percent as some of Medicaid drug spending shifts to Medicare. But starting in 2007, "Medicaid spending growth is projected to rebound to 8.5 percent and average 8.6 percent per year until 2015," the study said.

Medicaid spending for home care will accelerate from 2.4 percentage points in 2005 to 18.6 percent.

"We expect growth to decelerate in 2006 to 8.9 percent and then to average 10.7 percent though 2015," the analysts said.

The trend reflects a shift to care outside the nursing homes. But nursing home outlays will rise too. Medicaid spending for nursing home care will rise faster than Medicare or private spending. By 2015, "we expect Medicaid to pay for nearly half of all nursing home spending, compared with less than 45 percent in 2004," the report said.

Insurance Premiums
Premiums charged by private health insurance plans grew 6.8 percent in 2005, the study calculated, down from 8.4 percent growth in 2004. The slowdown stemmed in part from the "underwriting cycle," in which "growth in premiums first undershoots and then overshoots growth in the underlying medical spending trend," the authors said. But slower premium growth also stemmed from slower growth in medical benefits.

An upturn in the underwriting cycle will push premiums up at a faster rate in 2007, peaking at premium growth of 8.3 percent in 2009, the study projected.

The study calculated the total spending increase for hospital care in 2005 to be 7.9 percent, 1.5 percentage points more then GDP growth. By 2015, spending on hospital care is expected to reach $1.2 trillion, double the 2005 level. Near-term increases in hospital spending reflect in part the impact of an urban-area boom in hospital construction.

Among the major factors driving overall increases in health care spending are growth in personal income, new technology, and price increases, the analysts said. An increase in the proportion of elderly people accounts for only a small part of projected spending increases in the 2005–2015 period, they added.

The Bush administration's hope for controlling spending growth—health savings accounts—will have less of an impact than managed care did in the mid-1990s, the authors said. But they added that their data on the impact of HSAs are limited at this point.

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