CBO Health Care Expenditure Forecasts

The Congressional Budget Office (CBO) periodically releases its 75-year health care spending projections. Current projections forecast the following health care spending levels:

• Total spending on health care would rise from 16% of GDP in 2007 to 25% in 2025, 37% in 2050 and 49% in 2082.
• Federal spending on Medicare (net of beneficiaries premiums) and Medicaid would rise from 4% of GDP in 2007 to 7% in 2025, 12% in 2050 and 19% in 2082.

U.S. Health Care System Overview

The distribution of health care spending between public and private sources can in this chart. Currently health insurance although public health insurance is gaining ground, employer-provided health insurance still covers most Americans. Overall, healthcare spending has increased from 4.7% of GDP in 1960 to about 16% of GDP now. According to the CBO (as well as most other researchers) the major driver of this long term cost growth “has been the emergence, adoption, and widespread diffusion of new medical technologies and services.”

CBO Projection Methodology

The simplest way the CBO projects health expenditures is to use excess cost growth models. Excess cost growth measures increases in health care spending above the level of GDP growth. For instance, between 1975 to 2009 excess cost growth was 1.9 percentage points. Medicare excess cost growth was 2.3%, Medicaid excess cost growth was 1.9% and all other insurance (e.g., private health insurance, other public programs) had excess cost growth of 1.8%.

In reality, the forecasting method is much more detailed.

• Medicare and Medicaid Projections. The CBO projects total spending for Medicare and Medicaid less the contributions from states and enrollee premium contributions. Premiums are assumed to be a flat percentage of part B and Part D premiums. State contributions for Medicaid are held constant at 57% of total projections after the expiration of the temporary increase enacted in the American Recovery and Reinvestment Act of 2009.
• Budget Scenarios. The CBO uses two budget scenarios. The extended-baseline scenario assumes current laws do not change and that physician payment formulas will continue to apply and will necessitate large reductions in these payments over the next several years. The alternative fiscal scenario assumes that Medicare physician payment will increase with inflation. Spending on the alternative fiscal scenario is greater because the physician reimbursement rates are assumed not to be cut.
• Long term projection Details.
  • CBO projections from 2009-2019 used the projections from the CBO March 2009 budget report under both the extended-baseline and alternative fiscal scenario.
  • In 2020, excess cost growth for spending in Medicare and Medicaid will equal its historical levels of 2.3 percentage points and 1.9 percentage points respectively.
  • From 2009 through 2020, excess growth in all other spending (e.g., private health care and other public programs) will equal its historical average of 1.8 percentage points.
  • Excess growth in all three categories–Medicare, Medicaid and other spending–slows beginning in 2021. The slowdown in Medicare spending is one-third the rate of slowdown in non-Medicare spending.
  • Excess cost growth for other health spending declines smoothly from 1.8 percentage points in 2020 to 0.1 percentage points in 2083.
  • The rate of excess cost growth from Medicare drops from 2.3 percentage points in 2020 to 0.9 percentage points in 2083. For Medicaid, excess cost drops from 1.9 to 0.1 percentage points between 2020 and 2083.
  • Overall, average excess growth of all health care drops from 1.9 percentage points in 2020 to 0.5 percentage points in 2083, averaging 0.8 percent over that period.

Why will excess cost growth slow? The CBO gives four reasons: i) higher cost sharing, ii) increased utilization management, iii) reduced insurance coverage by employers, and iv) greater scrutiny of new technologies (e.g., cost effectiveness review). Under these projections, “spending per person by 2035 would have growth by more than $14,000 (in 2009 dollars) but more than 80 percent of that extra money would be spent on health care. Although spending for other goods and services would grow by just 14 percent, spending for health care would nearly triple.”

Source:

• “The Long-Term Outlook for Health Care Spending“, Congressional Budget Office, November 2007.