Comments About CBO’s Projections for Federal Health Care Spending

Posted by Doug Elmendorf on
March 10, 2014

I was very pleased to participate last week in the American Enterprise Institute’s World Forum. I spoke on two panels, one about health care policy and one about immigration policy. This blog posting summarizes my comments about health care policy; a blog posting tomorrow will summarize my comments about immigration policy.

I highlighted five aspects of CBO’s projections regarding health care. These are developments that we expect will occur under current law and therefore are important considerations in thinking about possible changes in law.

First, we project that, under current law, net federal spending for major health care programs will increase from about 4½ percent of GDP in 2013 to more than 6 percent of GDP in 2024.

By “major health care programs,” we mean Medicare, which provides coverage for older and disabled Americans; Medicaid, which provides care for many low-income Americans; the Children’s Health Insurance Program or CHIP, which provides coverage to children in families with slightly higher income; and subsidies provided through insurance exchanges. The figures for spending are “net” of offsetting receipts for Medicare, which are primarily premium payments. In dollar terms, net federal spending for major health care programs in 2013 was about $750 billion; the corresponding figure for 2024 in our projections under current law is more than twice as large, topping $1.6 trillion. Of the nearly $900 billion increase, a little less than half is in Medicare and a little more than half is in Medicaid, CHIP, and exchange subsidies.

Second, we project that, under current law, the number of people under age 65 without health insurance will fall sharply over the coming decade, from 57 million to 31 million.

That reduction of 26 million in the number of uninsured consists of:

  • 24 million people who, we expect, will receive coverage through the insurance exchanges and 
  • 13 million people who will receive coverage through Medicaid who would not have been eligible under the laws in effect before the Affordable Care Act (ACA),
  • Offset in part by reductions in the number of people receiving employment-based coverage and nongroup coverage outside exchanges relative to what would have occurred in the absence of the ACA.

Of the 31 million people who we project will remain uninsured, about one-third will not be eligible for federal subsidies—most because they will be unauthorized immigrants, and some because they live in states that will not expand Medicaid under the ACA and are too poor to be eligible for subsidies in the exchanges. The other two-thirds who we project will remain uninsured will be eligible for Medicaid or exchange subsidies, or will have access to insurance through an employer or the private market, but will choose not to buy insurance.

To be sure, our projections of the sources of insurance coverage are quite uncertain and may evolve over time in response to new evidence or analysis.

Third, we project that, under current law, the number of beneficiaries of Medicare will increase by more than a third over the next decade.

That will occur simply because the number of Americans over age 65 will increase by more than a third. By 2024, roughly 60 percent of baby boomers will be over age 65 and receiving Medicare benefits.

Fourth, we project that, under current law, spending per person in Medicare will increase much more slowly during the next decade than it has during the past few decades.

The slow growth per beneficiary in the coming decade can be attributed primarily to three factors:

  • One is the constraints on payment rates built into current law: The sustainable growth rate mechanism for payments to doctors (which will probably be modified in one way or another) will account for some of that effect, but most will stem from the constraints on payments imposed by the ACA (which might later be modified as well).
  • The second factor is the slow growth during the past several years in the quantity and intensity of health care services provided per beneficiary. That slowdown has been quite broad and persistent, extending across all types of Medicare services, beneficiaries, and major regions, as well as Medicaid and private health insurance. Based on our analysis of that slowdown, we expect slower growth to continue for a number of years.
  • The third factor is the anticipated influx of beneficiaries turning 65, which will lower the average age of Medicare beneficiaries and thus average health care spending for that group.

Taking all of those factors together, we project that Medicare spending per beneficiary after adjusting for inflation will grow in the coming decade at an average annual rate of 1.5 percent, compared with 4 percent between 1985 and 2007.

Fifth, we project that, under current law, most federal spending for health care in 2024 will support care for people over age 65—notwithstanding the expansion of subsidies for people under age 65.

That is partly because, as I noted, the number of beneficiaries of Medicare will rise sharply over the next decade. It is also because the aging of the population will push up spending for Medicaid. Older Medicaid beneficiaries are much more costly than younger ones, on average, because they tend to have greater need for both acute medical care and long-term services and supports, such as nursing home care. As a result, in 2013, only 8 percent of Medicaid beneficiaries were over age 65, but they accounted for about 20 percent of Medicaid’s benefit payments.

Based on those considerations, we project that, of net federal spending for major health care programs in 2024, about three-fifths will finance care for people over age 65, about one-fifth will finance care for people who are blind or disabled, and the remaining one-fifth will finance care for able-bodied nonelderly people.