Sources of growth in projected health care costs

May 29, 2008

CBO released an issue brief today on different approaches for splitting the projected growth in the costs of the major federal health care programs into "excess cost growth" and demographic effects (these two factors reflect, respectively, rising costs per beneficiary and the number and age of beneficiaries). For more information about CBO's projections of long-term health care costs, see here.

The key points of the issue brief are:

  • If health care costs per beneficiary grew at the same rate as per capita gross domestic product (GDP) and the age distribution of the population did not change, Medicare and Medicaid spending would remain a constant share of the economy. In reality, however, health care costs per beneficiary will grow more quickly than per capita GDP and the population will age.
  • Although many observers portray aging as the dominant cause of future growth in federal spending on Medicare and Medicaid, most of the increase that CBO projects reflects rising costs per beneficiary rather than rising numbers of beneficiaries. The effect of population aging is smaller but still results in substantial spending growth. Rising costs and population aging also interact with each other: The rapid growth of health care costs is a more important factor when the population is aging over time; conversely, population aging looms larger when health care costs are rising over time.
  • Understanding the relative contributions of those two factors to the growth in federal spending on Medicare and Medicaid is important. The aging of the population, which has a smaller impact on spending growth, cannot be easily influenced by policy changes, but efforts can be made to stem the rising costs per beneficiary relative to per capita GDPby far the larger factor in spending growth in the two programs.
  • To estimate the relative contributions of the two factors, CBO based its projections on three sets of reasonable assumptions. Regardless of the assumptions and methods used in the projections, the results were basically the same: More than half of the growth in federal spending on Medicare and Medicaid is attributable to health care costs per person growing more rapidly than per capita GDP. Depending on the approach used, by 2082 between 53 percent and 60 percent of the accumulated growth is attributable solely to cost growth, between 14 percent and 17 percent is attributable solely to aging, and the remainder (between 26 percent and 30 percent) is attributable to the interaction of those two factors as costs grow and the population ages at the same time. Over the next 25 years, aging will be relatively more important, accounting for between 27 percent and 35 percent of projected growth by 2032, but even during that period, CBO's estimates suggest that more than half of the growth in spending will result from rising costs per beneficiary.

The issue brief was written by Noah Meyerson, who works in the long-term modeling group within our Health and Human Resources Division.