The coming surges in healthcare spending are expected to be driven by Medicare and Medicaid.

Feb. 15—Healthcare spending increases slowed in 2016—while still exceeding growth in gross domestic product (GDP)—but are expected to accelerate in succeeding years, federal actuaries predict.

Healthcare spending increases slowed to 4.8 percent in 2016—when spending reached nearly $3.4 trillion—after increasing by an average of 5.5 percent in 2014 and 2015, according to a new report by the Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS). Spending increases are expected to accelerate to 5.4 percent in 2017 and 5.9 percent in 2019.

Over the coming decade, national healthcare spending is projected to increase at an average annual rate of 5.6 percent—outpacing average projected GDP growth by 1.2 percentage points. The new projections do not assume any changes in existing laws, including the Affordable Care Act (ACA), which has been targeted for repeal and replacement by the Trump administration and congressional Republicans.

The coming surges in healthcare spending are expected to be driven by Medicare and Medicaid, while growth in private health insurance spending will slow down.

Medicaid spending increases are expected to jump from 3.7 percent in 2017 to 5.9 percent in 2019. The coming increases were attributed to an expected end in the surge of relatively healthy enrollees from the ACA’s eligibility expansion, which was adopted by 31 states and is credited with adding 16.4 million enrollees since the expansion started in October 2013, according to a recent report from CMS. 

“So as the enrollment growth slows in Medicaid you would expect that the aged and disabled would comprise a larger share since we’re not picking up these newly eligible enrollees like we did in 2014 and 2015,” Devin Stone, an economist in the Office of the Actuary, said at a media briefing.

Similarly, Medicare spending increases are expected to accelerate from 5.9 percent in 2017 to 7.1 percent in 2019. That increased spending also was credited to the larger numbers of older and sicker enrollees, with the oldest Baby Boomers now entering their 70s.

Medicare spending on physician clinical services is expected to increase by 5.3 percent in 2017, compared with 3.9 percent in 2016. Similarly, 2017 Medicare hospital spending is expected to increase by 4.9 percent, up from 4.3 percent in 2016.

“Higher growth in the use of Medicare hospital services is expected in part as the downward pressure on growth attributable to the readmission penalties and the two-midnight rule that occurred during 2011-2015 is not expected to continue,” the report’s authors wrote.

Outlook for Private Insurers

Private health insurer spending increases are expected to slow from 6.5 percent in 2017 to 5.7 percent in 2019. That anticipated slower growth was credited to several factors, including a continued shift of out-of-pocket costs to enrollees, more prior-authorization requirements, and greater use of utilization review.

“Employers seem willing to increase cost sharing to help have their employees share in increases in health benefit costs; whether that shows itself in moving to high-deductible health plans [HDHPs] or whether it shows itself by staying in the same type of plan but imposing more cost sharing, that’s not something we specify,” Sean Keehan, an economist for the Actuary, said at the briefing.

In the first nine months of 2016, 39.1 percent of people under age 65 with private insurance were covered by an HDHP, up from 36.7 percent in 2015, according to a recent report by the Centers for Disease Control and Prevention.

The divergent spending trends between public and private health insurance are expected to increase the share of healthcare spending by federal, state, and local governments by one percentage point to 47 percent of the total by 2025, with spending by businesses and households falling to 53 percent.

Price Role

Medical prices are expected to fuel the growth in spending. Prices increased by 0.8 percent in 2015—a historic low—and are expected to rise by nearly 3 percent annually by 2025. Medical price inflation is expected to increase from 1.3 percent in 2016 to an annual average of 2.7 percent from 2020 to 2025.

Healthcare employee wage increases—which are faster than those elsewhere in the economy—are expected to fuel those overall price increases more than they have in the recent past. Healthcare entities have embarked on a hiring binge in recent years, adding 472,000 positions in 2015 and 422,000 in 2016, according to an Altarum Institute analysis.

Countervailing trends include an expected slowdown in the growth of the use and intensity of medical services from recent 2014 and 2015 highs, which were credited to insurance expansions under the ACA.

Increases in Medicare spending in 2017 are expected to be driven by greater expenditures for physicians, clinical services, and hospital services.

Private health insurance spending growth in 2017 is expected to be fueled by premium increases in plans sold in the ACA marketplaces. A recent analysis by consulting firm Avalere Health found that for 2017, premiums for the popular, low-cost silver plans in the ACA marketplaces increased by between 12 percent and 25 percent. Silver-plan deductibles increased by 20 percent to an average of $3,703.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, February 15, 2017