CMS Projects 5.8% Healthcare Spending Growth Annually Through 2024

Key drivers for spending growth include an improving economy, an aging population, spiraling drug costs, and coverage expansion under the Patient Protection and Affordable Care Act.

Healthcare spending growth will increase by an average of 5.8% annually over the next decade and will consume nearly 20% of the nation's gross domestic product by 2024, according to projections issued Tuesday by actuaries at the Centers for Medicare & Medicaid Services.

Key drivers for spending growth include an improving economy, an aging population, spiraling drug costs, and coverage expansion under the Patient Protection and Affordable Care Act, according to the federal government's projections, which were published Tuesday in Health Affairs.

As a result, healthcare spending as a share of the nation's GDP will increase from 17.4% in 2013 to 19.6% in 2024.

The nearly 6% annual increase in healthcare spending growth would likely wildly outstrip overall inflation in the larger economy, which was at 0.4% for the past year.

"When you have healthcare inflation growing much faster than CPI, you have healthcare spending crowding out other spending in the family budget, and it also happens in government budgets," says Tevi Troy, president of the American Health Policy Institute. "Medicare/Medicaid spending is starting to crowd out all other spending to the point where all government spending is going to be for healthcare and service to the debt."

CMS actuaries are calling the healthcare cost growth projections "relatively modest" when compared with the 9% average annual growth in healthcare spending in the 30 years before the 2007 recession. The actuaries note that the slowing growth comes even 8.4 million people have gained insurance coverage.

During a conference call with media on Tuesday afternoon, CMS actuary Sean P. Keehan said healthcare costs growth "will rebound from their relative historic lows, but they are not going to reach levels where they were pre-recession time."

"There are a few reasons why we think that," Keehan says. "There is going to be more price transparency and price sensitivity and the presence of narrow networks. We are projecting that they will keep the acceleration of price growth fairly modest."

CMS actuary Gigi A. Cuckler said the projections can't provide before-and-after scenarios to measure the effects of the PPACA.

"It's no longer pragmatic," Cuckler says. "We can't come up with a counter factual of what spending would have been. The law has been in effect for five years."

However, her colleague John A. Poisal said that "it is fair to say there are certain components of the law that have resulted in faster spending."

"The coverage expansion, people gaining coverage, [and] in some cases people moving to more generous coverage, is likely to exert upward pressure whereas some of the cuts to Medicare payment updates would exert some downward pressure," he says. "There is a mix and the ACA impacts how they play out."

The continued rise in high-deductible health plans that make consumers shoulder more of the cost is expected to play a significant role in keeping healthcare cost growth in check, CMS said.

Analysis 'Raises Questions'
Trish Riley, executive director of the National Academy for State Health Policy, says healthcare consumers are playing a big role in reducing healthcare spending growth.

"They talk about high deductibles as changing patient behavior, but that begs the questions of what happens to their healthcare and what does the underlying healthcare cost," she says. "Instead of addressing the tough issues of healthcare costs, we pass it on to consumers. There is nothing wrong with the analysis, but it does raise questions."

Healthcare spending growth in 2013 was close to the historically low rate of 4%. As the economy improved, CMS says spending growth increased to 5.5% in 2014, the first time growth surpassed 5% annually since 2007.

The increase in overall spending, which amounted to $3.1 trillion in 2014, was driven by the newly insured, and by prescription drugs, most notably the expensive new treatments for hepatitis C. As a result, prescription drug spending growth increased from 2.5% in 2013, to 12.6% in 2014, its highest annual rate of growth since 2002. From 2013 to 2014 prescription drug prices rose from 2.3% to 4.1%, CMS said.

Cost growth is expected to decelerate to 5.3% in 2015 as some of the initial effects of the PPACA moderate and drug spending slows. By the end of the decade, annual healthcare cost growth is expected to increase by 6% annually due to the medical costs associated with aging baby boomers, with nearly 40% of every healthcare dollar going to either Medicare or Medicaid.

For now, many value-based payment models and other reforms haven't been around long enough to determine their potential to drive savings, Cuckler says.

"To the extent that these programs have been implemented and actually illustrated savings, they have been incorporated into the Medicare and NHE projections," Cuckler says. "However, it is still too early to determine whether or not these demonstrations will have a lasting effect on health spending.

John Holahan, an institute fellow at the Urban Institute, says the CMS's 10-year projections are reasonable, at least for the first five years.

"They do a pretty good job of explaining what's happened recently and their projections out to about 2018 make sense for the reasons they give," he says. "But for the 2018–2024 period, it's almost like they throw up their hands and say the past several years have been too good to be true so it's going to go back to the way it used to be."

"The headline will be that we'll be pretty close to 20% of GDP by 2024. They could certainly well be right, but since so much of the action occurs in these out years when forecasting gets riskiest, you have to take it with a grain of salt."

Medicaid Expansion

The report also noted that Medicaid covered 66.5 million people in 2014, a 12.9% increase in lives covered. Spending growth for the program grew by spending 12%. However, because the newly enrolled Medicaid beneficiaries tend to be healthier than the traditional Medicaid enrollee, per enrollee spending growth fell off from 3.8% in 2013 to -0.8% in 2014, CMS said.

In the private sector, commercial health plans saw their premiums increase by 6.1% in 2014, up from 2.8% in 2013. Private health plans collected more than $1 trillion in 2014. The annual spending growth for private plans is expected to hit 5.6% in 2024, compared with 7.9% for Medicare and 5.9% for Medicaid.

Troy says he "was surprised by how unsurprising it was to see the numbers continue to go up."

"The ACA, by expanding coverage is spending more money. The population is continuing to age. We still have too many people who are overweight or obese. We have the overall costs going up, and insurance premiums are getting higher," says Troy, who was deputy secretary of the Department of Health and Human Services from 2007–2009.

"The moderation in health inflation over the past couple of years may be a trend that has played itself out. It predates the ACA. We are going to continue to see spending growth until we see some policy changes."

Troy says it's "presumptuous" to declare that any one action can slow healthcare cost growth, "because we haven't been able to do it."

"But overall we have to have a more value-driven health system. It can't be dependent wholly on third-party payments and people need to take more responsibility for their healthcare. It's easy to say, but getting there is hard to do."