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Behind the numbers: The projected rise in health care spending

Health spending in the U.S. is projected to accelerate in the next decade. Stanford professor Kevin Schulman offers an explanation.

The numbers are out, and we can expect health care spending in the United States to grow faster in the next decade than in the past 10 years.

In fact, new projections from the Office of the Actuary at the federal Centers for Medicare and Medicaid Services tell us that by 2027, health expenditures will represent almost a fifth of the total value of goods and services produced in the United States in a year, aka the gross domestic product. That's a significantly higher proportion of the economy than in other countries -- the next-highest spending country is Switzerland, at 12.2 percent, and the percentages go down from there.

As a physician and economist, this doesn't make me happy. Ballooning health costs crowd out other important expenditures. In the private sector, this can mean slower increases in cash wages for workers, as employers pay the rising cost of health care benefits. In the federal budget, this tightens difficult choices among competing priorities. At the state level, health care demands can displace spending on education and other important services.

But to change health spending trends in this country, it's important to first understand the forces at work.

I'll start with the most basic of basics: Aside from investment and administration, health spending represents the amount paid by private insurers, government programs and consumers out-of-pocket to reimburse doctors, hospitals, drug companies and others for care to individuals.

Forecasters tell us that by 2027, expenditures will look like this:

  • Medicare, the government health insurance program for seniors and the disabled: $1.4 trillion, after growing at an average annual rate of 7.4 percent.
  • Medicaid, the government health insurance program for low-income people paid jointly by state and federal governments: $992 billion, after annual growth of 5.5 percent.
  • Private health insurance: $1.9 trillion, after annual growth of 4.8 percent.

Those are mind-boggling amounts of money. Let's explore the drivers behind the upward trends.

One is growth in enrollment: Medicare expenditures will grow as people age into the program. With the aging of the baby-boom population, enrollment will swell from 60 million to 74 million beneficiaries by 2027. Medicaid also is expected to see an increase in enrollment -- growing from 75.2 million to 82.5 million enrollees -- as five more states expand eligibility starting this year under the Affordable Care Act.

On the other hand, slightly fewer people will be covered by private insurance, according to the projections. This is because the ACA's tax penalty for being uninsured without a waiver will no longer be in effect, and also because those older baby boomers will shift to Medicare coverage.

A second driver is an increase in cost -- the amount providers are paid for their services; price increases are expected to account for nearly half of the growth of health spending on individual care. Shifts in the use and intensity of care is expected to account for about one third of the increase in spending.

The projections suggest that efforts over the past decade that were successful in holding down cost increases will be less effective in the coming decade (cost-sharing for health care services, for example, accelerated over the last decade; high-deductible health plans are now one-third of the private health insurance market but have not increased in market share recently).

All told, forecasters are predicting that for Medicare per enrollee costs will grow from $13,240 to $19,546 per year. For Medicaid, which provides additional support to some Medicare beneficiaries and also is a main source of coverage for long-term care, annual per enrollee costs are projected to rise from $8,289 to $12,029. And private health insurance spending is expected to increase from $6,511 to $9,384 per enrollee per year.

What about out-of-pocket spending for consumers, you ask?

Annual per-person spending is projected to grow from $1,200 to $1,661 from 2019 to 2027. But out-of-pocket spending will actual decrease as a share of national health consumption expenditures, from 11 percent to 10.3 percent. Possible reasons include the growth of Medicaid and the lack of high-deductible health plans in Medicare.

Overall, this is not a pretty picture, you may be thinking, and I would agree.

It is often said that a forecast is only accurate until it is put on paper, and that may be the case here. What is striking to me is that though this careful actuarial analysis is based on past spending and accounts for a variety of macroeconomic factors such as overall economic growth, it does not account for several potential accelerators of health care spending. I'm concerned about the future impact of obesity on utilization of health care services, the budgetary effects of personalized medicine, and the continued expansion of specialty pharmaceutical products, such as high-cost cancer therapies, to name a few.

However, there may be a ray of hope. These projections also do not consider how future innovations may work to reduce health care spending. Sitting in Silicon Valley, and looking across the portfolio of technology companies interested in the health care market, it's easy to posit that change is in store for health care. Imagine the impact of a digital transformation of health care services on these projections.

What an opportunity.

Kevin Schulman is a professor of medicine and clinical hospitalist at Stanford, and a professor, by courtesy, of economics at the Graduate School of Business. As a member of the Clinical Excellence Research Center, he studies ways to reduce the cost of high-quality care.

Photo by Steve Buissinne

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