For immediate release:
Tuesday, February 21, 2007
12:01 a.m. EDT


Christopher Fleming

Health Care Spending Projected To Pass $4 Trillion Mark By 2016

 Federal Analysts Predict That Nation’s Health Care Tab Will Consume Almost 20 percent Of GDP

Bethesda, MD -- Over the next decade, U.S. health care spending is expected to double from today’s level, reaching $4.1 trillion and consuming almost twenty cents of every dollar spent, federal forecasters report in an article published today as a Health Affairs Web Exclusive. Health spending in 2006 is projected at $2.1 trillion, which accounts for 16 percent of the gross domestic product.

The average annual growth in health care spending is projected to remain relatively steady at 6.9 percent from 2006 through 2016, predict economists and actuaries from the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) in their annual forecasting report. The growth in health spending is expected to drop slightly from 6.9 percent in 2005 to 6.8 percent in 2006, marking the fourth consecutive year of a slowdown in spending, preliminary data show. The CMS authors say that the addition of the Medicare drug benefit, slower projected growth in Medicaid, and slower growth in private health care spending are among the factors contributing to these trends. Despite the mild expected slowdown, consumers’ out-of-pocket spending on health care -- expected to reach $250.6 billion in 2006 -- is projected to climb to more than $440.8 billion by 2016, they report.

“Although recent changes in health care spending growth have been modest, some of the most dramatic changes taking place are the shifts in payment distribution in Medicare, Medicaid, and the private insurance industry as Medicare Part D is fully implemented,” said John Poisal, deputy director of the National Health Statistics Group at the CMS. “As the nation moves from more traditional sources of insurance, such as employer-based coverage, to more federal- and state-provided health care, we will continue to face tough questions about how we finance our health care bill.”

The new Medicare drug benefit’s effects on spending are just beginning to appear. Total Medicare spending growth is expected to reach $417.6 billion in 2006 with the addition of Medicare Part D, up from $342.0 billion in 2005. Medicare spending growth in 2007 is projected to slow to 6.5 percent, in part because of legislated Medicare cuts in payments to managed care plans and reductions in payments to physicians. By 2016, Medicare spending is expected to more than double from 2006’s level to almost $862.7 billion.

Medicaid spending is expected to reach $313.5 billion in 2006, virtually the same as in 2005, as a result of a slower growth in enrollment and a deceleration in payments to physicians and hospitals. Medicaid drug spending is projected to drop an eye-popping 36 percent between 2005 and 2006 as low-income recipients who also are eligible for Medicare began to get their drug coverage through the new Part D program. Although Medicaid is seeing its lowest growth rate since the late 1990s, state and federal Medicaid spending is expected to rebound to 7.3 percent in 2007 and grow at an average of 8.1 percent per year throughout the rest of the projection period.

Prescription Drug Spending

Prescription drug spending is projected to reach $497.5 billion by 2016, more than double the expected drug spending level for 2006. CMS researchers predict that prescription drug spending will grow at an average annual rate of 8.6 percent until 2016, as increases in the generic drug dispensing rate levels off, new drugs to treat cancer and other diseases are approved, and drugs already on the market gain approval for new versions or treatments. Drug spending in 2006 is expected to grow 6.5 percent. Implementation of Part D is expected to increase prescription drug use among beneficiaries who previously had limited or no drug coverage. However, the expected increase as a result of Part D is anticipated to be offset by a deceleration in drug price growth.

Hospital Spending

By 2016, the cost of hospital care is projected to climb to more than $1.2 trillion, compared with the $651.8 billion level expected for 2006. Total hospital spending is expected to grow 6.6 percent in 2006, falling from 7.9 percent in 2005 and slowing for the first time since 2003. The decline in the growth of spending is largely attributable to slower growth in public spending. However, a rebound in public and private spending trends is expected to spur an average annual growth rate in hospital spending of 7.0 percent during the next decade.

Other Highlights From The Report

Out-of-pocket spending. Consumers are expected to spend less than 1 percent more out of pocket, or $250.6 billion, on health care in 2006, according to preliminary data. That level is expected to climb to $440.8 billion by 2016. The out-of-pocket share of private personal health care spending is expected to decline from 27.3 percent in 2005 to 26.4 percent in 2006, the year Medicare Part D began. The portion of private personal health care spending paid for out of pocket is expected to decline to about 25.0 percent by 2016.

Private health insurance. Private health insurance premiums are expected to grow 4.4 percent in 2006, a significant drop from a high of 11.0 percent growth in 2002. The drop is due to slower growth in projected medical benefits per enrollee, changes to consumers’ out-of-pocket spending, and variation in the net costs of private health insurance, also known as the underwriting cycle. Excluding the effects of Medicare Part D, premiums are expected to grow 6.0 percent in 2006, down from 6.5 percent in 2005.

Physician services Growth in total physician and clinical spending is projected to decelerate from 7.0 percent in 2005 to 6.1 percent in 2006, driven by slow price growth. However, price growth is expected to accelerate to 4.5 percent by 2016. CMS researchers predict that physician spending will reach almost $819.9 billion by that date, even with restraints on Medicare physician reimbursement called for under current law, compared with a projected $447.0 billion in physician spending for 2006.

Nursing homes. Driven by Medicaid and Medicare costs, nursing home spending growth is expected to decelerate from 6 percent in 2005 to 3.4 percent in 2006. Medicaid spending growth on nursing home care is expected to slow from 3.9 percent in 2005 to 1.3 percent in 2006 as a result of states’ efforts to control costs. Nursing home spending growth is expected to remain steady at about 5 percent from 2007 through 2010 before it gradually accelerates to about 5.5 percent by 2016, when spending on nursing home care is projected to reach $210.9 billion, compared with $126.1 billion in expected spending in 2006.

Home health. Home health spending is projected to jump 1.4 percentage points in 2006 to 12.5 percent -- reaching $53.4 billion and making it the fastest-growing area of health care, although representing a relatively small piece of the spending pie. The increase is fueled by faster growth in Medicaid spending in this sector, with a projected growth rate of 19.8 percent for Medicaid home health spending in 2006. CMS analysts forecast that total growth in this area is expected to average 7.6 percent per year from 2007 through 2016, when spending is expected to reach $111.1 billion.

You can read the article by Poisal and coauthors at


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