National Health Expenditure Projections And A Few Ways We Might Avoid Our Fate

National Health Expenditure Projections And A Few Ways We Might Avoid Our Fate

Every year, authors from the Centers for Medicare and Medicaid Services (CMS) publish 10-year projections for national health expenditures. As in the past, this year’s report—“National Health Expenditure Projections, 2021” by John Poisal and colleagues—provides policy makers insight into how health care spending will evolve under current law (that is, assuming federal laws such as those that define Medicare payment rates or Medicaid coverage rules remain constant).

The projections are disaggregated by payer (Medicare, Medicaid, and commercial) and service type (hospital, physicians, and so forth). As a result, they provide the most comprehensive analyzes to help answer questions such as how fast spending will grow across the various components of the health sector over the next 10 years if federal policy does not change. For this reason, the projections provide an early warning system for policy makers as they address the fiscal challenges facing our health care system. This is important because many policy reforms are phased in, and thus if we want to affect health care spending in the future, we often need to enact legislation now.

Like all projections, they rest on assumptions and are thus uncertain. This year’s projections are particularly challenging because the early years reflect assumptions about how care patterns will evolve as we recover from the COVID-19 pandemic. COVID-19 led to a dramatic reduction in use of health care in 2020, and care patterns are returning to normal in 2021 (the first year of the projection) through 2024. Spending growth rates in the early years of the projections are also affected by federal policies designed to support the delivery system during the public health emergency, which are expiring in 2022.

Despite all of the caveats, the top-line projections are relatively encouraging. The share of gross domestic product (GDP) devoted to health care in 2020 was 19.7 percent, and this is projected to fall slightly to 19.6 percent by 2030 (although it is expected to dip to just above 18.0 percent by 2023 before increasing back toward the 2020 level). We have never had a decade in which the share of GDP devoted to health care has fallen. This optimism is misleading, however. The 19.7 percent figure for 2020 reflects GDP depressed by COVID-19 and substantial federal assistance to health care providers (which contributes to national health expenditures). National health expenditures in 2019 represented 17.6 percent of GDP (which has been relatively stable since 2015). Taken in that light, the 19.6 percent share of GDP projected for 2030 represents meaningful growth. Between 2025 and 2030, after the distortions due to COVID-19 have waned, national health spending is projected to grow at 1.2 percentage points per year faster than GDP.

As John Poisal and colleagues describe, much of the spending growth is expected to be driven by Medicare. Specifically, Medicare is projected to grow 6.8 percent per year between 2025 and 2030, relative to 5.6 percent for Medicaid, and 4.8 percent for commercial insurance. Yet, the policy implications associated with these figures depend on the causes of spending growth, and those causes vary across these sectors. For example, Medicare spending growth in excess of economywide growth is driven by increases in the number of Medicare beneficiaries and projected increases in volume and intensity of services. Prices in Medicare are projected to fall relative to inflation, reflecting low current law fee trajectories for physicians (due to the Medicare Access and CHIP Reauthorization Act of 2015) and facilities (due to the Affordable Care Act [ACA] productivity adjustments).

In contrast, enrollment in commercial health insurance is expected to be relatively flat, leaving excess spending growth driven by prices and increases in volume and intensity of services. The commercial volume and intensity growth reflects a connection between income growth and growth in use of health care services that, based on evidence, is built into the CMS models. In essence, projections of excess Medicare spending growth per enrollee are driven by volume and intensity growth, whereas excess commercial spending growth per enrollee is driven by both price increases and income-driven increases in volume and intensity.

The current projections, like those before, illustrate the importance of policy in driving spending. For example, growth in Medicaid spending reflects several policy forces both at the state level (such as expansion decisions) and the federal level (such as expiration, in 2027, of federal policies related to disproportionate share payments to hospitals). Similarly, Medicare spending is influenced by policies such as reimposition of the sequester. The projections hold federal policy constant but reflect assumptions about how state policy will change.

Given the importance of policy in driving projections, it is useful to consider a few key areas where policy may change, and this could have important effects on actual spending.

State Policy

State policy initiatives changes in the next decade related to both Medicaid and commercial markets could have important impacts on the trajectory of health spending.

Medicaid Policy

It is no surprise that state Medicaid policy will have a significant impact on spending. Twelve states have not yet expanded Medicaid, despite incentives to do so. Decisions about whether to expand will influence spending, as will decisions about eligibility. The current projections assume some reductions in enrollment after the public health emergency ends in states that have already expanded, but also that more states will expand Medicaid in the future.

Commercial Market Regulation

State policy around spending in the commercial markets and related price regulation will be important. Several states, such as Colorado, Washington, and Nevada, have, or have plans for, a public option. Others have, or are exploring, approaches to regulate commercial prices or to control commercial spending growth with the support of health policy commissions. Some states, such as Montana, have policies to control spending for state employees by limiting prices that can be charged to state employee plans. Over the next decade, states will likely be an active locus of policy action. The success of these efforts (or not) will have a meaningful impact on spending.

Federal Policy

Several aspects of federal policy are likely to change over the next decade and will influence actual spending. Many of these relate to Medicare.

Medicare Prices

Over the next decade, there may be a lot of pressure to increase physician fees, which are set to rise by 0.25 percent (or 0.75 percent if participating in an advanced alternative payment model) in nominal terms. This is below assumed inflation, and if inflation projections increase, pressure to increase fees may be even stronger. Increases in facility fees have been, and will continue to be, dampened by the ACA productivity adjustments. Between 2010 and 2019, Medicare hospital margins have fallen on average from -4.9 percent to -8.7 percent. While total hospital margins remain healthy on average, Medicare margins for efficient hospitals are close to zero and, over the next decade, may turn negative, raising pressure to raise fees. This pressure may be exacerbated by concerns over the viability of safety-net hospitals. Thus, it may be reasonable to expect that the actual trajectory of Medicare fees will exceed the current law trajectory, driving spending growth above what is presented in these current law projections.

Prescription Drugs

Another area of ​​federal policy that will be important relates to prescription drugs. The pipeline of new drugs, particularly specialty drugs, as well as price increases for existing drugs, has the potential to increase spending and has attracted considerable policy attention. Many of these drugs will be financed by Medicare Part B. The new drugs contribute to the assumed volume and intensity growth in Medicare. Policies designed to constrain price growth and increase competition between drugs may meaningfully affect not only drug prices but also incentives to develop and launch new products.

Medicare Advantage And Alternative Payment Models

The Medicare Advantage (MA) program is a growing share of Medicare. Many consider one objective of the MA program to be reduction in Medicare spending, which is possible because MA plans can deliver Part A and B services for a lower cost than traditional Medicare. Yet, increasingly, MA has become a vehicle for providing more generous benefits to Medicare beneficiaries, particularly some disadvantaged populations. These added benefits are financed not only by MA efficiencies but also by explicit policy decisions, such as setting MA benchmarks above fee-for-service spending in some markets, payments from the quality bonus program, and a risk-adjusted system that increases payments to MA plans relative to fee-for-service. As a result of these factors, payments to MA plans exceed the spending that would have occurred in traditional Medicare. The excess of MA payments above traditional Medicare as well as concerns about aggressive MA plan coding behavior have led to calls for reductions to MA payment rates. Because the added benefits of MA have grown considerably lately, because the value of the added benefits are unclear, and because plans will likely respond to any payment cuts with some bid reductions, some reduction in payment may be achieved with only modest impact on benefit generosity .

Given the low current law fee trajectories in traditional Medicare, efforts to control volume and intensity increases in that program will likely be an important component of efforts to slow Medicare spending growth. Alternative payment models (APMs) may be central to accomplishing this goal by reducing the incentive for greater volume that is characteristic of our fee-for-service system. The APM landscape continues to evolve, and the success of that evolution will influence the rate of growth of volume and intensity of service use in traditional Medicare.

There are of course many other policy changes that influence Medicare, Medicaid, and commercial spending (as well as other government spending and spending for the uninsured). For example, policies related to the ACA Marketplaces may be important.

Changing The Trajectory

The key idea for readers of the current projections to keep in mind is that these projections are not pre-ordained. Actual spending growth is something we can influence through a range of policy actions as we balance our desire to promote access to high-value care for all Americans with the fiscal sustainability of the health care system.

Author’s Note

Dr. Chernew has research grants from Blue Cross Blue Shield Association, Health Care Service Corporation, Ballad Health, and Signify Health, LLC; received personal fees from Blue Cross Blue Shield of Florida, Humana, and America’s Health Insurance Plans; equity in Archway Health and Waymark, Inc.; serves on advisory boards for National Institute for Health Care Management and Blue Cross Blue Shield Association. Dr. Chernew serves as the current chair of the Medicare Payment Advisory Commission. The opinions presented in this piece are Dr. Chernew’s alone and do not reflect those of the Medicare Payment Advisory Commission.

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