WASHINGTON – Despite a huge increase in the number of Americans who will have insurance coverage when the main provisions of the Affordable Care Act take effect in 2014, the nation’s overall health spending in that year is projected to rise only 2% above the expected yearly average increase for the rest of the decade, economists from the Centers for Medicare and Medicaid Services said July 27.
The 8% growth in spending expected in 2014 is in line with the average 5.8% annual rise in health spending expected each year from 2010 to 2020 and is relatively small given that, by 2014, an estimated 23 million more Americans will have health insurance coverage under the Affordable Care Act (ACA), said Sean P. Keehan, an economist in the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS).
Over the next decade, the ACA is projected to add only a tenth of a percentage point to the nation’s overall health spending, Mr. Keehan and his colleagues reported in the journal Health Affairs (August [doi:10.1377/hlthaff.2011.0662]).
The ACA is expected to drive a 20% increase in Medicaid costs and a 9% increase in private insurance spending in 2014. The economists said that many of the newly insured Americans will be younger and healthier than are the existing populations covered by Medicaid and private insurance.
With the new coverage, they are likely to use more physician services (a projected 9% increase in 2014) and pharmaceuticals (a projected 11% increase in 2014), the authors said.
The increases in spending will not be offset by Medicare cuts in the first year, according to the report, an actuarial and econometric analysis of data from the 2011 Medicare Trustees Report, done under a current-law framework.
The projections could be substantially affected by the outcome of the ongoing federal debt ceiling talks and, in a few years, by any potential changes in the Medicare Sustainable Growth Rate (SGR) formula.
In 2012, the SGR calls for an-almost 30% cut in Medicare physician payments. If that happens, Medicare spending would only grow by 1.7%, instead of by 5.9%, according to the study. If the Congress decides to try an alternative, such as tying fee increases to the Medicare Economic Index, Medicare spending would rise by 6.6%.
The impact of the SGR on both Medicare and total health spending is very large, Medicare chief actuary Rick Foster said in an interview. Medicare accounts for roughly 20% of the nation’s total health spending and physician services are a large chunk of Medicare spending, he said. If Congress approves a total replacement of the SGR – which is estimated to cost approximately $300 billion over 10 years– that money would be directly added to total spending, Mr. Foster said.
In 2010, the growth in health spending was, for the second year in a row, near a historic low, driven largely by the recession. The $2.6 trillion represented almost 18% of the gross domestic product (GDP). That was about the same share as the previous year, as both health spending and the GDP grew relatively slowly, according to the report.
Medicare spending growth slowed because of less spending on private Medicare Advantage plans. Private health insurance spending grew only 2.6% in 2010, as more people lost jobs and coverage. Americans for the second year in a row also spent less out-of-pocket.
Overall, spending on physician and clinical services grew only 2.4% in 2010. The economists said they expect that figure to rebound by 4% in 2011, but to slow again in 2012, largely because of the SGR cut. That year, physician spending may only rise by 0.8%.
With many major provisions of the ACA taking effect in 2014, physician spending is expected to grow by 8.9% that year, a $17.8 billion increase over what would have been expected without health reform, according to the report.
The CMS economists highlighted several other trends. Going forward, federal, state, and local governments are expected to become ever-larger payers and financiers of health care. Currently, Medicare and Medicaid (combining federal and state contributions) pay about 36% of the nation’s health bills. By 2020, that is expected to grow to 40%. In 2010, federal, state, and local governments financed 43% of the nation’s health bill through direct payments and subsidies. By 2020, that is expected to reach 49%.
The growth will come from Medicare’s expansion because of retiring Baby Boomers, Medicaid expansions through the ACA, and federal subsidies for Americans covered under the health exchanges.
The authors are all employees of the Centers for Medicare and Medicaid Services.