CBO: National Healthcare Spending to Increase to 22% of GDP by 2038

National healthcare spending will increase to approximately 22 percent of the gross domestic product by 2038 under current law, driven by various factors such as an aging population, new medical technologies and expanding health insurance coverage, according to the Congressional Budget Office's 2013 long-term budget outlook report.

captiol buildingThe CBO projects spending on federal healthcare programs including Medicare, Medicaid and the Children's Health Insurance Program will grow much faster than the economy, increasing from their current level of 5 percent of GDP to 8 percent by 2038.

In 2011, total spending for healthcare in the United States was approximately $2.5 trillion — 16.4 percent of the GDP, according to the CBO. Private financing accounted for 53 percent of that spending, and public sources made up the remaining 47 percent.

Of the private spending sources, payments from private health insurers made up 35 percent of total healthcare expenditures in 2011. Consumers' out-of-pocket expenses accounted for 12 percent, and other sources such as philanthropy made up 5 percent.

Concerning public spending, Medicare was responsible for 22 percent of total expenditures in 2011. Federal and state spending for Medicaid and the Children's Health Insurance Program made up 16 percent. Various programs run by state and local government health departments, the Department of Defense, the Department of Veterans Affairs and workers' compensation programs accounted for 9 percent.

The aging baby boomer population is one significant factor driving the increase in spending on major healthcare programs, considering the fact that per capita outlays for federal health programs tend to rise with age. Between now and 2038, the portion of the population aged 65 and older is expected to increase from 14 percent to 21 percent. Furthermore, the percentage of the population 80 and older will grow from 4 percent to 7 percent. Overall, the aging population will account for 35 percent of the projected growth for federal spending on healthcare programs through 2038.

Excess cost growth — or the spending per enrollee in federal healthcare programs outpacing per capita GDP growth — will account for 40 percent of that spending growth. However, the per-beneficiary spending growth rate is expected to slow compared with recent decades. Continued healthcare spending growth will put an increasing amount of pressure on state governments and the private sector to contain costs, and their efforts will affect federal spending, according to the CBO.

The Patient Protection and Affordable Care Act will also contribute to spending growth because of its Medicaid expansion provision and federal subsidies to help people with incomes between 100 percent and 400 percent of the federal poverty level purchase health plans through the new health insurance exchanges. The CBO estimates increased Medicaid enrollment and additional federal spending on subsidies will account for 26 percent of the spending increase for major healthcare programs through 2038.

Still, projected spending on federal healthcare programs has decreased compared with last year's CBO estimate, which projected federal spending for major health care programs would equal 8.7 percent of the GDP in 2038. Revisions to the GDP led to 0.2 percentage points of that drop. Most of the remaining percentage point reduction comes from lower spending projections for the next decade, and a small amount results from a decline in the projected long-term healthcare cost growth rate.

Although spending for Medicare and Medicaid has grown quickly in recent decades, federal spending on those programs grew at about the same rate as the economy from 2009 to 2011. Gross federal spending for Medicare grew more slowly than the economy in 2012 and Medicaid spending grew at the same rate as the economy in 2012, according to the CBO.

From 2014 to 2023, the CBO projects an average annual rate of excess cost growth of about 0.3 percent for Medicare, only slightly faster than the potential GDP per capita. The slow growth rate stems from historically low annual payment rate updates. The PPACA includes reductions in pay rates, and sequestration and scheduled payment reductions for physicians under the Medicare sustainable growth rate will also slow spending growth. However, it seems unlikely the SGR reductions will actually take effect, since Congress has temporarily bypassed the SGR so physicians would not have to endure double-digit cuts to their Medicare pay. The House Energy and Commerce Committee also unanimously approved a bill this past summer that would get rid of the SGR as of next year.

Federal Medicaid spending is expected to show an average annual excess cost growth rate of about 1.5 percent. The expansion of benefits in some states to adults earning up to 138 percent of the federal poverty level under the healthcare reform law will increase total Medicaid spending but not spending per beneficiary, so it isn't expected to have a significant impact on cost growth.

More Articles on Healthcare Spending:
PwC: Healthcare Spending Suffering From Recession "Hangover"
CBO: Factors Other Than Recession Slowed Medicare Spending
Healthcare Share of GDP Drops to 17.4% 

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