CHAPTER
2
The Long-Term Outlook for Medicare, Medicaid, and Total Health Care Spending
Spending for health care in the United States has been growing faster than the economy for many years, posing a challenge not only for the federal government’s two major health insurance programs, Medicare and Medicaid, but also for the private sector. Measured as a percentage of the nation’s gross domestic product, total spending for health care increased from 4.7 percent in 1960 to 15.2 percent in 2007, the most recent year for which data are available.1 Total spending for Medicare and Medicaid (which for the latter includes both federal and state spending) rose from 1.7 percent of GDP in fiscal year 1975 to 5.7 percent in fiscal year 2008. Over the same period, net federal spending for the two programs rose from 1.2 percent of GDP to 4.1 percent.2
The growth of health care spending in the long term will be determined primarily by growth in the cost of medical care per person. The aging of the population will also contribute to future spending growth, especially for Medicare, which will cover a growing number of beneficiaries as baby boomers become eligible for the program and life expectancy continues to rise. Those demographic trends are also projected to increase costs for Medicaid by boosting the demand for long-term care. The Congressional Budget Office projects, however, that spending for Medicare and Medicaid will increase much more rapidly than will their enrollments—because the programs’ costs per beneficiary are growing faster than the economy.
CBO projects that without significant changes in policy, total spending for health care will be 31 percent of GDP by 2035 and will increase to 46 percent by 2080. Total spending for Medicare is projected to increase to 8 percent of GDP by 2035 and to 15 percent by 2080. Total spending for Medicaid is projected to increase to 5 percent of GDP by 2035 and to 7 percent by 2080.
Overview of the U.S. Health Care System
A combination of private and public sources finances health care in the United States. Most Americans under the age of 65 have private health insurance that they obtained through an employer. According to CBO’s estimates, in 2010, about 56 percent of that population (150 million people) will have employment-based coverage, and about 5 percent (13 million people) will have private coverage purchased directly from an insurer.3 At any given time during that year, in CBO’s estimation, about 50 million people (19 percent of the nonelderly population) will be uninsured. In 2010, CBO projects, about 100 million people will be covered by Medicare and Medicaid, the two main sources of public financing for health care.
In 2007, total spending for health care (spending for health services and supplies) amounted to nearly $2.1 trillion, or 15.2 percent of the nation’s GDP. Some 54 percent of that amount was financed privately; the rest of the spending came from public sources. Payments by private health insurers were the largest component of private spending, making up 37 percent of total expenditures on health care. Consumers’ out-of-pocket expenses, which include payments made to satisfy deductibles, copayments for services covered by insurance, and payments for services not covered by insurance, accounted for 13 percent of those expenditures.4 Other sources of private funds, such as philanthropy and certain employers (those that maintain on-site clinics for their workers), accounted for 4 percent of total health care spending.
Federal spending for Medicare made up 21 percent of total health care expenditures in 2007, and federal and state spending for Medicaid, 16 percent. A variety of other public programs accounted for 10 percent of total spending. Such programs included those run by state and local governments’ health departments, the Department of Veterans Affairs, and the Department of Defense; workers’ compensation programs; and the Children’s Health Insurance Program.
From 1975 to 2007, the share of total health care spending that was financed privately shrank slightly, dropping from 59 percent to 54 percent, while the share that was financed publicly expanded correspondingly, increasing from 41 percent to 46 percent. During that period, consumers’ out-of-pocket payments fell from 31 percent of total expenditures to 13 percent, and payments by private insurers rose from 25 percent to 37 percent.
Overview of the Medicare Program
Medicare provides federal health insurance for 45 million people who are elderly or disabled (the elderly make up about 85 percent of enrollees) or who have end-stage renal disease or amyotrophic lateral sclerosis (also known as Lou Gehrig’s disease). People become eligible for Medicare on the basis of age when they reach 65; disabled individuals become eligible for Medicare 24 months after they become eligible for benefits under Social Security’s Disability Insurance program.
Part A of Medicare, or Hospital Insurance, covers inpatient services provided by hospitals as well as skilled nursing and hospice care. Part B, or Supplementary Medical Insurance, covers medical equipment and services provided by physicians and other practitioners and by hospitals’ outpatient departments. Part B also covers a limited number of drugs, most of which must be administered by injection in a physician’s office.5 Depending on the circumstances, home health care may be covered under either Part A or Part B. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added a voluntary prescription drug benefit to the program, which became available in 2006 as Part D of Medicare.
The various parts of the program are financed through different means. Part A benefits are financed primarily by a payroll tax (2.9 percent of taxable earnings), the revenues from which are credited to the Hospital Insurance (HI) Trust Fund. The fund in turn pays for benefits and administrative costs under Part A and makes other authorized expenditures. For Part B, premiums paid by beneficiaries cover about one-quarter of its outlays, and general revenues cover the rest.6 Enrollees’ premiums under Part D are set to cover about one-quarter of the cost of the basic prescription drug benefit. However, receipts from premiums cover less than one-quarter of Part D’s total cost because some of the federal outlays for it (such as subsidies for low-income beneficiaries and for employers that maintain drug coverage for their retirees) are not included in the calculation of premiums.
In fiscal year 2008, net mandatory federal spending for Medicare was $386 billion.7 Gross spending for the program totaled $456 billion, of which $454 billion covered benefits for enrollees. About 28 percent of that $454 billion paid for inpatient hospital care, and 19 percent paid for services provided by physicians and other professionals as well as outpatient ancillary items or services (see Table 2-1).8 About 20 percent of Medicare’s expenditures went toward the Medicare Advantage program (discussed below), and 10 percent paid for prescription drug benefits under Part D.
Medicare Spending for Benefits, by Type of Service, Fiscal Year 2008
Source: Congressional Budget Office.
a. Includes only hospital outpatient services for which payment is made under Medicare’s prospective payment system.
b. Includes hospital outpatient services for which payment is not made under Medicare’s prospective payment system and services provided by outpatient dialysis facilities, rural health clinics, and various other facilities.
Most Medicare beneficiaries receive their Part A and Part B benefits through the traditional fee-for-service portion of the program, which pays providers for each covered service (or bundle of services) they provide. Beneficiaries must pay part of the costs of their care through deductibles and copayments. Unlike many private insurance plans, Medicare does not include an annual cap on beneficiaries’ cost sharing. In 2005, though, nearly 90 percent of beneficiaries who received care in the fee-for-service portion of Medicare had supplemental insurance that covered many or all of the program’s cost-sharing requirements. The most common sources of supplemental coverage were plans for retirees offered by former employers (held by 37 percent of beneficiaries in the fee-for-service part of Medicare), individually purchased medigap policies (33 percent of beneficiaries), and Medicaid (17 percent).9
As of May 2009, 24 percent of Medicare beneficiaries were enrolled in private health plans under the Medicare Advantage program (also known as Part C of Medicare). The private plans submit bids indicating the per capita payment for which they are willing to provide benefits under Part A and Part B of Medicare, and the government compares those bids with county-level benchmarks that are determined in advance through statutory rules. If a plan’s bid exceeds the benchmark, the plan is paid the amount of the benchmark; if a plan’s bid is less than the benchmark, the plan is paid the amount of the bid plus 75 percent of the amount by which the benchmark exceeds the bid. Plans must return that 75 percent to beneficiaries as additional benefits (such as reduced cost sharing for Medicare services) or as a rebate on their premiums for Part B or Part D.
Under current law, benchmarks in a county are required to be at least as great as per capita expenditures incurred in the fee-for-service portion of Medicare in that county. In many such jurisdictions, the benchmarks are higher than those expenditures. CBO calculates that for 2009, benchmarks will be 18 percent higher, on average, than projected fee-for-service expenditures per capita nationwide, and that payments to Medicare Advantage plans will be about 14 percent higher than spending per beneficiary in the fee-for-service portion of the program.
Overview of the Medicaid Program
Medicaid is a joint federal–state program that pays for health care services for a variety of low-income individuals. The program, created in 1965 by the same legislation that created Medicare, replaced an earlier program of federal grants to states to provide medical care to people who had low income. In fiscal year 2008, federal spending for Medicaid was $201 billion, of which $180 billion covered benefits for enrollees. (In addition to benefits, Medicaid’s spending covered payments to hospitals that treat a “disproportionate share” of low-income patients, costs for the Vaccines for Children program, and administrative expenses.) The federal government’s share of Medicaid’s spending for benefits varies among the states but generally averages 57 percent. (Under a provision of the American Recovery and Reinvestment Act of 2009, that share temporarily increases to approximately 67 percent from fiscal year 2009 through the first quarter of fiscal year 2011.) In fiscal year 2008, states spent $152 billion on Medicaid.
States administer their Medicaid programs under federal guidelines that specify a minimum set of services that must be provided to certain poor individuals. Mandatory benefits include inpatient and outpatient hospital services, services provided by physicians and laboratories, and nursing home and home health care. Groups that must be eligible (according to federal requirements) include poor children and families who would have qualified for the former Aid to Families with Dependent Children program, certain other poor children and pregnant women, and most elderly and disabled individuals who qualify for the Supplemental Security Income program. In general, a person who enrolls in Medicaid must have both a low income and only a few assets, although the minimum financial thresholds vary, depending on the basis for an enrollee’s eligibility.
Within broad statutory limits, states have flexibility in administering the Medicaid program and determining its scope. Partly as a result, the program’s rules are complex, and it is difficult to generalize about the types of enrollees covered, the benefits offered, and the cost sharing required. States may choose to make additional groups of people eligible (such as individuals who have high medical expenses and have “spent down” their assets) or to provide additional benefits (such as coverage for prescription drugs and dental services), and they have exercised those options to varying degrees. Moreover, many states seek and receive federal waivers that allow them to provide benefits and cover groups that would otherwise be excluded. By one estimate, total expenditures on optional populations and benefits accounted for about 60 percent of the Medicaid program’s spending in 2001.10
On the basis of data from the Department of Health and Human Services, CBO estimates that about half of Medicaid’s 62 million enrollees in fiscal year 2008 were poor children and that another one-quarter were either the parents of those children or poor pregnant women (see Table 2-2).11 Per capita costs for those groups were relatively low, though, whereas expenses were higher for elderly and disabled beneficiaries, many of whom required long-term care. (Although the elderly and disabled constitute about one-quarter of Medicaid’s enrollees, they account for two-thirds of the program’s spending.) Overall, about one-third of Medicaid’s spending in fiscal year 2008 was for long-term care, which includes nursing home services, home health care, and other medical and social services for people whose disabilities prevent them from living independently.
Medicaid Enrollees and Federal Benefit Payments, by Category of Enrollee, Fiscal Year 2008
Source: Congressional Budget Office using data from the Department of Health and Human Services.
About 50 percent of Medicaid beneficiaries are enrolled in managed care plans that accept a capitated payment (a fixed amount per enrollee) for providing a comprehensive set of benefits. Those arrangements are more common for families and children, although some states also enroll elderly and disabled people in such plans. About 15 percent of beneficiaries are enrolled in an arrangement that provides what is termed primary care case management, in which enrollees select (or are assigned) a primary care physician or group practice that is paid an additional fee for overseeing and coordinating their care. Many states also use “carve-out” arrangements, in which a state contracts with organizations that assume the responsibility and financial risk for providing a subset of Medicaid benefits, such as dental services or mental health care.
The Historical Growth of Health Care Spending
For the most part, total spending for health care in the United States—that is, private and public spending combined—has risen steadily as a share of GDP over the past several decades (see Figure 2-1). A notable exception was the period from 1993 to 2000, when health care’s share of the economy remained relatively stable. Many analysts have attributed that lull in growth to a substantial rise in the number of people enrolled in managed care plans as well as to excess capacity among some types of providers, which increased the leverage that health plans had in negotiating payments.
Total Spending for Health Care Under CBO’s Extended-Baseline Scenario
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Notes: Total spending for health care comprises spending for health services and supplies as defined in the national health expenditure accounts maintained by the Centers for Medicare and Medicaid Services. Amounts for Medicare include beneficiaries’ premiums and amounts paid by the states representing part of their share of the savings from shifting some Medicaid spending for prescription drugs to Part D of Medicare. Amounts for Medicaid include spending by states.
The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections from 2009 to 2019 and then extending the baseline concept for the rest of the projection period.
Costs for Medicare and Medicaid have also grown rapidly in recent decades. Between fiscal years 1975 and 2008, federal spending for Medicare rose from 0.8 percent of GDP to 2.7 percent, in part because of increased enrollment, which climbed from 25 million in 1975 to 45 million in 2008. (Those figures for spending are net of Medicare beneficiaries’ premiums and, beginning in 2006, amounts paid by the states from savings on prescription drug costs in the Medicaid program. In fiscal year 2008, those offsetting receipts from premiums and states’ payments equaled 0.5 percent of GDP.) Between fiscal years 1975 and 2008, total spending for Medicaid, including spending by the states, increased from 0.8 percent of GDP to 2.5 percent. Over that same period, federal spending for the program increased from 0.4 percent of GDP to 1.4 percent.
Factors Underlying the Historical Growth of Health Care Spending
Most analysts agree that the most important factor contributing to the growth of spending for health care in recent decades has been the emergence, adoption, and widespread diffusion of new medical technologies and services.12 Major advances in medical science allow providers to diagnose and treat illnesses in ways that previously were impossible. Many of those innovations rely on costly new drugs, equipment, and skills. Other innovations are relatively inexpensive, but their costs add up quickly as growing numbers of patients make use of them. Although technological advances can sometimes reduce costs, in medicine such advances and the resulting changes in clinical practice have generally increased spending.
Other factors that have contributed to the growth of health care spending include increases in personal income and the growth of health insurance coverage. Demand for medical care tends to rise as real (inflation-adjusted) family income increases. Moreover, the expansion of insurance coverage in recent decades, as evidenced by the substantial reduction in the percentage of health care spending that people pay out of pocket, has also increased demand, because insurance coverage reduces the cost of medical care for consumers. However, according to the best available evidence, increasing income and insurance coverage cannot explain much of the growth in health care spending in recent decades.
Another source of spending growth has been the aging of the population. Among adults, average medical spending generally increases with age, so as the population becomes older, per capita spending for health care rises. Over the past 30 years, the effect of aging on such spending has been relatively modest. But in the coming decades, the aging of the baby-boom generation will account for a large share of the growth in spending for Medicare and Medicaid. (See Box 1-2 for a discussion of those demographics and the growth of federal health care costs.) Demographics will also have a growing effect on national health care spending.
When analyzing historical trends in the growth of health care spending, it is useful to distinguish between the various components of that growth. Factors that affect spending for health care include general inflation; growth in the size of the population; and, to a lesser extent, changes in the population’s age composition. Removing the effects of those factors reveals the amount of spending growth attributable to factors beyond inflation and demographics.
The most useful way to measure the growth of spending over the long term is to gauge the increase in health care spending for an average individual relative to the growth of GDP per capita, which is commonly referred to as “excess cost growth.”13 The phrase is not intended to imply that growth in per capita spending for health care is necessarily excessive or undesirable. It simply measures the extent to which the growth in such spending exceeds the growth in per capita GDP, after adjustments for changes in the age composition of the population.
CBO’s projections are based in part on historical trends in excess cost growth since 1975. The purpose of beginning in that year is to include a long historical period but exclude the start-up period for Medicare and Medicaid. By 1975, both programs had been in effect for nearly 10 years, and Medicare’s benefits had been available to nonelderly disabled Social Security beneficiaries for 2 years.
In computing historical rates of overall cost growth, CBO removes the effects of changes in the age composition and size of the relevant population.14 Thus, for Medicare and Medicaid, CBO excludes the effect of increases in the number of beneficiaries in the programs. For Medicare and for the overall growth of health care spending, it also removes the effect of changes in the age composition of the population.15 For Medicaid, CBO removes the effect of changes in the composition of the program’s caseload—that is, changes in the portions of beneficiaries who are children, disabled people, elderly people, and other adults.16
From 1975 to 2007, overall excess cost growth amounted to 1.9 percentage points. That measure captures the growth of total spending for health care, including payments from all private and public sources. As shown in Table 2-3, excess cost growth during that period was 2.3 percentage points for Medicare, 1.9 percentage points for Medicaid, and 1.8 percentage points for all other health care spending (that is, spending by the private sector and by federal, state, and local governments for health care programs other than Medicare and Medicaid).
Excess Cost Growth in Spending for Health Care
Source: Congressional Budget Office.
Note: Excess cost growth refers to the number of percentage points by which the growth of spending for Medicare or Medicaid, or for all other health care (per beneficiary or per capita), exceeded the growth of nominal gross domestic product (per capita).
The rate of overall excess cost growth was faster during the earlier part of the 1975–2007 period and slower during the second half, averaging 2.6 percentage points from 1975 to 1990 but only 1.4 percentage points from 1990 through 2007. Since 1993, overall excess cost growth exceeded 1 percentage point only from 2001 through 2003. (During that three-year period, it averaged 4.4 percentage points.) It is difficult to determine, however, to what extent the slower growth experienced in the past 15 years or so reflects one-time changes (for instance, the spread of managed care) and to what extent the underlying trend has changed. Another consideration is that rates of excess cost growth in the Medicare and Medicaid programs are driven partly by changes in law and policy, which have expanded the programs and tried to limit the growth of their costs. Most notably, in 1983, Medicare implemented a prospective payment system under which hospitals are paid a predetermined rate for each admission, an approach that has reduced some of the program’s costs.
Long-Term Projections of Spending for Medicare and Medicaid
In the absence of an unprecedented change in long-term trends, spending for health care will grow substantially over the coming decades. CBO’s long-term projections (covering 2009 to 2083) provide a useful measure of the scope of the potential problem posed by rising health care costs. In reality, however, federal law will change in the future, ensuring that the basis for the projections will turn out not to be correct. Moreover, the projections are subject to the inherent uncertainty surrounding any long-term estimates, especially those that apply to health care.17
To estimate the federal government’s net long-term spending for Medicare and Medicaid, CBO first projects total spending for the two programs and then subtracts the nonfederal components—for Medicare, the premiums paid by beneficiaries and amounts paid by the states from savings on prescription drug costs in the Medicaid program; and for Medicaid, the amount of states’ spending. In its projections, CBO calculates premiums for Medicare as a flat percentage of gross spending for Part B and Part D and holds constant the share of Medicaid’s spending paid for by the states. (CBO uses the typical average share of 57 percent for projections over the long term after expiration of the temporary increase enacted in the American Recovery and Reinvestment Act of 2009.) Spending for Medicare and Medicaid beneficiaries that is not financed through the programs, such as out-of-pocket payments and payments resulting from individually purchased medigap insurance, is not federal spending, so it is included instead in the category of other health care spending.
CBO’s long-term projections show spending for health care, including federal spending for Medicare and Medicaid, under the two budget scenarios discussed in Chapter 1:
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The extended-baseline scenario, which incorporates the assumption that current law does not change. For Medicare, that assumption means that the existing formula for determining the payment rates for physicians (the “sustainable growth rate” formula) will continue to apply and will necessitate large reductions in those payments over the next several years. |
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The alternative fiscal scenario, which incorporates the assumption that both programs continue to operate as under current law—except that Medicare’s payment rates for physicians will grow with inflation. (For those calculations, CBO uses the Medicare economic index, which measures inflation in the “inputs”—primarily compensation for physicians and other workers—that providers use to produce medical services.) |
CBO assumed that under both scenarios, Medicare benefits would continue to be paid in full regardless of the financial status of the Hospital Insurance Trust Fund.18
Projected spending for Medicare under the alternative fiscal scenario is slightly greater than under the extended-baseline scenario, but the difference is small. Projected health care spending other than that for Medicare—including federal spending for Medicaid—differs only slightly under the two scenarios. In CBO’s projections, both Medicare premiums and out-of-pocket spending by Medicare beneficiaries are set equal to a fixed percentage of Medicare’s costs, so they are slightly higher under the alternative fiscal scenario. However, because most premiums are paid by individuals, they are a component of other health care spending, as are out-of-pocket costs. Medicaid pays for a small portion of the premiums for Medicare.
Underlying Assumptions for CBO’s Projections of Health Care Spending
CBO’s approach to developing its long-term estimates differs for the first 10 years of the projection period—2009 to 2019—from its treatment of the later years. For that initial 10-year span, CBO set its projections of spending for Medicare and Medicaid under the extended-baseline scenario to match those in its March 2009 budget outlook.19 The March projections were based on a detailed analysis of each program rather than on the simpler approach that CBO used for its longer-term projections. Under the alternative fiscal scenario, CBO’s projections of outlays beginning in 2010 are slightly higher than under the extended-baseline scenario.
For its projections covering 2020 to 2083, CBO combined assumptions about excess cost growth in health care spending with projections of the growth and aging of the population and the growth of per capita GDP. CBO assumed that in 2020, the rate of excess cost growth for Medicare would be 2.3 percentage points and the rate for Medicaid, 1.9 percentage points—the average excess cost growth rates for the programs from 1975 to 2007 (see Table 2-4). The rate for all other health care spending from 2009 through 2020 was assumed to equal its historical average of 1.8 percentage points.
Assumptions About Excess Cost Growth in Spending for Health Care Over the Long Term
Source: Congressional Budget Office.
Note: Excess cost growth refers to the number of percentage points by which the growth of spending for Medicare or Medicaid, or for all other health care (per beneficiary or per capita), exceeded the growth of nominal gross domestic product (per capita).
CBO assumed that in later years of the 2020–2083 period, even in the absence of changes in federal law, excess cost growth would slow. As health care expenditures continued to increase as a share of GDP, they would disproportionately absorb people’s income, allowing only slow growth in the consumption of goods and services besides health care. As a result, pressure to slow the growth of costs would mount as health care accounted for a larger and larger share of the American economy. The private sector and state governments would probably respond by instituting various changes. Employers would quite likely intensify their efforts to reduce the costs of the plans they sponsored—for example, by working with insurers to make health care more efficient or by reducing insurance coverage. Insurers would also probably raise premiums and increase out-of-pocket charges. Employees would then react to the higher charges either by shifting to plans with lower premiums—and more restrictive coverage or benefits management—or by directly limiting their consumption of health care in response to their higher out-of-pocket spending.20
It is impossible to predict with any confidence how such a process would unfold and how much cost growth might slow. One simple and transparent approach is to set a path of excess cost growth that is consistent with a rule about patterns of households’ consumption. For the projections laid out in CBO’s December 2007 The Long-Term Budget Outlook, CBO assumed that within the projection period considered in that report (2008 to 2082), households overall would be unwilling to spend so much more on health care that, from one year to the next, the increase in such spending alone was greater than the total increase in consumption. Specifically, CBO assumed that excess cost growth would decline smoothly, beginning in the 12th year of the projection period, to such an extent that by the end of the 75-year period, per capita expenditures on items besides health care would be stable. Under that assumption, total spending per capita would always increase from one year to the next, but in the last year of the projection period, the entire increase would be devoted to health care.
In the absence of fundamental changes in the health care sector since the 2007 report was published, CBO assumed for this report that the rate of excess cost growth for other health care spending in 2083 (the last year of the current 75-year projection period) would be 0.1 percentage point, the rate used for the last year covered by the 2007 report. As described in more detail below, CBO combined that assumption with assumptions about the relationships between the excess cost growth rates for Medicare, Medicaid, and other health care spending to determine the cost growth rates for Medicare and Medicaid and thus the growth of total health care spending.
If the slowdown in excess cost growth that CBO incorporated in its projections did occur, it would not be painless. Households would probably face increased cost sharing; new and potentially useful health technologies would probably be introduced more slowly or be used less frequently than they would without a slowdown in excess cost growth; and more treatments or interventions might simply not be covered by insurance. State governments would probably respond to growing costs for Medicaid by limiting the services they chose to cover or by tightening eligibility to reduce the number of their beneficiaries. Nevertheless, Americans would still face steadily increasing costs for health care. In other words, even though the rate of growth might decline, the real, or inflation-adjusted, level of health care costs would continue to rise.
A slowdown in the growth of health care spending might be particularly difficult to achieve in the absence of changes in federal law—the basic assumption underlying CBO’s projections. But at some point, financial pressures would become so severe that measures to curb spending growth would be taken. Because state governments and the private sector would have more flexibility to respond to those pressures than would the federal government without statutory changes, CBO assumed that excess cost growth in Medicaid’s spending and in non-Medicaid, non-Medicare spending would each slow at the same rate and would slow more than Medicare’s spending. (Because the federal government’s spending for Medicaid depends on what the states each spend, actions by the states that reduced the growth of their Medicaid spending would also slow the growth of federal spending for the program.)
Still, a slowdown in spending growth would affect Medicare, which is integrated to a significant degree with the rest of the health care system. To the extent that actions by individuals, businesses, and states resulted in lower-cost “patterns of practice” by physicians, slower development and diffusion of new technologies, and cost-reducing changes to the structure of the overall health care system, Medicare would experience some reduction in cost growth. In particular, CBO assumed that the federal government would make regulatory changes aimed at slowing the growth of spending for Medicare (and Medicaid) and that the demand for health care services by Medicare beneficiaries would decline as the program’s increased premiums and cost-sharing amounts consumed a growing share of beneficiaries’ income.
Thus, on the basis of its own analysis and discussions with outside health policy experts, CBO assumed that without changes in federal law, the combined effects of those factors would be to reduce Medicare’s excess cost growth by one-third of the reduction that took place in the growth of non-Medicare spending. In other words, under a scenario in which the rate of growth of health care spending outside that of Medicare declined from 2.0 percent to 1.0 percent annually, Medicare’s spending growth would decline from 2.0 percent to about 1.7 percent per year. Therefore, if federal law remained unchanged, the growth of spending for Medicare could continue to outpace the overall growth of health care spending.
In summary, CBO’s methodology for its projections of health care spending is based on the following set of assumptions:
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Spending for Medicare and Medicaid from 2009 through 2019 under the extended-baseline scenario equals the projections in CBO’s March 2009 budget outlook, whereas projections of spending for the programs under the alternative fiscal scenario are slightly higher.21 |
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In 2020, excess cost growth in spending for Medicare and for Medicaid is equal to the programs’ average historical cost growth of 2.3 percentage points and 1.9 percentage points, respectively. |
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From 2009 through 2020, excess cost growth in all other spending for health care is equal to its historical average of 1.8 percentage points. |
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Excess cost growth in all three categories—Medicare, Medicaid, and other health spending—slows beginning in 2021. |
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The slowdown in Medicare’s spending is one-third the rate of the slowdown in non-Medicare spending. |
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Excess cost growth for other (non-Medicare, non-Medicaid) health spending declines from 1.8 percentage points in 2020 to 0.1 percentage point in 2083. |
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Under those assumptions, the rate of excess cost growth for Medicare drops from 2.3 percentage points in 2020 to 0.9 percentage points in 2083 and the rate for Medicaid falls from 1.9 percentage points to 0.1 percentage point (see Table 2-4). |
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As a result of the assumptions about excess cost growth, average excess growth for all health care spending declines from 1.9 percentage points in 2020 to 0.4 percentage points in 2083, averaging 0.8 percent over that period. |
It may be difficult to envision how excess cost growth in Medicare’s spending could continually outstrip spending for Medicaid and other health care over such a long period. Theoretically, actions to reduce spending growth in the private sector could weaken the incentives to develop and diffuse new medical technologies for nonelderly people yet have little effect on new technologies focused on diseases that principally affect the elderly. In reality, such a variance is unlikely to persist. Changes in federal statutes are probably necessary to ensure that spending for Medicare does not diverge excessively from overall health spending.
Projections of Health Care Spending
Over the past 30 years, total spending for health care has more than doubled as a share of GDP. According to CBO’s projections, under the extended-baseline scenario, that share will double again by 2035, to 31 percent of GDP. Thereafter, health care costs will continue to account for a steadily growing share of the economy, reaching 37 percent of GDP by 2050 and 46 percent by 2080 (see Figure 2-1).
CBO projects that in 2009, Medicare’s and Medicaid’s total spending will each be about 3 percent of GDP. By 2035, spending for Medicare will have more than doubled, in CBO’s estimation, to 8 percent; by 2080, it will have grown to 15 percent. CBO projects that the growth of spending for Medicaid will be slower than Medicare’s spending growth, because it assumes that the rate of excess cost growth will be lower and that the aging of the population will affect Medicaid to a lesser extent than it does Medicare. CBO estimates that total spending for Medicaid will grow to 5 percent of GDP by 2035 and 7 percent by 2080.
Although the rate of cost growth is projected to slow over the 2009–2083 period, the annual increase in the level of spending is expected to remain high. For example, for the five years beginning in 2015, CBO projects that total health care spending under the extended-baseline scenario will increase from 19.2 percent of GDP to 21.8 percent. For another five-year period, from 2035 to 2040, CBO projects that health care spending will rise from 30.8 percent of GDP to 33.3 percent. From one perspective, the percentage change during the latter period is much slower—8 percent rather than 14 percent. But in both periods, health care spending increases by about 2.5 percent of GDP.
CBO projects that over the next 75 years, total spending for Medicare and Medicaid will account for a growing share of total health care spending—because the assumed rates of excess cost growth for Medicare will slow less quickly than will the rate for other health care spending and because a larger share of the population will be older than 65. In 2009, total spending for Medicare and Medicaid is projected to make up 37 percent of total health care spending. CBO projects that under the extended-baseline scenario, that ratio will grow to 41 percent by 2035 and to nearly half of all health care spending by 2080.
As a result of the relatively fast growth projected for total Medicare and Medicaid spending, net federal health care spending over the coming decades—that is, spending for Medicare excluding beneficiaries’ premiums and amounts paid by the states from prescription drug savings for Medicaid, together with the federal share of Medicaid’s spending—will also make up a larger share of total spending for health care. The federal share will increase from 29 percent in 2009 to about 31 percent in 2035 and to 37 percent in 2080. As a share of GDP, federal spending for Medicare and Medicaid will grow from 5 percent in 2009 to 10 percent in 2035 and to 17 percent in 2080.
In CBO’s projections, federal outlays under the alternative fiscal scenario would be slightly higher than under the extended-baseline scenario. The small difference arises because the alternative fiscal scenario’s assumption that Medicare’s physician fees are updated to account for inflation has a minor effect over the long term: Throughout the projection period, outlays under the two scenarios differ by less than 1 percent of GDP.
How Rising Health Care Costs Would Affect Other Consumption
Historically, economic growth has been driven primarily by improved productivity. As the average worker is able to produce more, the average citizen can consume more. As the population ages and a smaller portion of it is employed, per capita GDP is likely to grow more slowly, but, on average, future generations will be substantially richer than Americans are today. In 2009, total consumption per person is expected to average about $26,000, of which about $6,000 will be spent on health care. Under CBO’s projections, spending per person by 2035 would have grown 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 (see Figure 2-2).
Total Health and Nonhealth Spending Per Capita Under CBO’s Extended-Baseline Scenario
Source: Congressional Budget Office.
Notes: Total spending is equal to the sum of personal and government consumption as defined by the Bureau of Economic Analysis. Total spending for health care comprises spending for health services and supplies as defined in the national health expenditure accounts maintained by the Centers for Medicare and Medicaid Services.
The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections from 2009 to 2019 and then extending the baseline concept for the rest of the projection period.
In addition, although the consumption of goods and services besides health care would, on average, be stable at the end of the projection period, the effect would vary for different individuals. Lower-income people tend to spend less than the average amount for health care, but that spending represents a larger portion of their earnings than it does for others. Also, people generally have less flexibility in their spending for health care than in their consumption of other things. For example, even in companies that offer multiple options for health insurance, premiums do not vary substantially. Consequently, as costs for health care increased, higher-income people would generally still be able to increase their consumption of other goods and services, whereas poorer people would probably see their spending for those items decline.22
Projections Under Alternative Assumptions
Although all long-term economic and demographic trends are difficult to forecast and thus uncertain, future excess cost growth in health care spending during the next century may be particularly so. Systems of health care and health care financing have existed in their current forms for only a few decades, and medical technology continues to evolve rapidly. The projections in this report will undoubtedly prove to be inaccurate in one direction or another. And judging their accuracy will be difficult even after the fact, because they assume no changes in federal law and such changes are virtually certain to occur.
Even without policy changes, though, actual spending for health care could be much lower or much higher than in CBO’s and other forecasters’ projections. In the past, technological developments have generally resulted in the expansion of treatment options and greater total spending. Future innovations could accelerate that trend. Alternatively, if future research resulted in the development of inexpensive curative therapies or if the health care sector changed in other fundamental ways, growth could slow.
For comparison purposes, CBO projected federal spending for Medicare and Medicaid under varying assumptions about excess cost growth. A projection for which such growth is held constant at zero, although implausible, is useful because it isolates the effect of the aging of the population (see Figure 2-3). Under such a scenario of zero excess cost growth, projected net federal outlays for the two programs would increase from 5 percent of GDP in 2009 to almost 7 percent by 2035; outlays would then rise gradually to slightly more than 7 percent of GDP by 2080. Under a scenario in which excess cost growth was 2.5 percentage points—or roughly the average rate of growth during the 1980s—net federal spending for the two programs would grow to 12 percent of GDP by 2035 and to 41 percent by 2080.
Federal Spending for Medicare and Medicaid Under Different Assumptions About Excess Cost Growth, 2009 to 2080
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Notes: Excess cost growth refers to the number of percentage points by which the growth of annual health care spending per beneficiary is assumed to exceed the growth of nominal gross domestic product per capita.
The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections from 2009 to 2019 and then extending the baseline concept for the rest of the projection period.
Projections of the balances in the Hospital Insurance Trust Fund offer another way to look at the sustainability of Part A of Medicare.23 A commonly used measure is the actuarial balance—that is, the present value of revenues plus the trust fund balance minus the present value of outlays over a specified period (the present value is a single number that expresses a flow of current and future income or payments in terms of an equivalent lump sum received or paid today). That difference is shown as a percentage of the present value of taxable payroll over the same period.24 (To account for the difference between the trust fund’s current balance and the desired balance at the end of the period, the balance at the beginning of the period is added to the projected revenues, and an additional year of costs at the end of the period is added to projected outlays.)
A negative actuarial balance represents the amount by which revenues as a percentage of taxable payroll (the income rate) could be increased immediately and in every year of the projection period to cover all projected costs and provide the desired balance in the trust fund at the end of the period. (Alternatively, outlays as a percentage of taxable payroll could be reduced by an equivalent amount.) The income-rate increase required to meet that goal would be 6.1 percentage points, which is the difference between projected income equal to 3.6 percent of taxable payroll and projected costs totaling 9.7 percent of taxable payroll (see Table 2-5). For example, one way to increase revenues by that amount would be to increase the HI payroll tax rate from its current 2.9 percent to 9.0 percent. In the nearer term, the required income-rate increases would be smaller: for a 25-year projection period, 1.3 percentage points; for a 50-year period, 4.3 percentage points.
Summarized Measures for Medicare’s Hospital Insurance Trust Fund
(Percentage of taxable payroll)
Source: Congressional Budget Office.
Note: The income and cost rates are the present values of annual revenues and costs over the relevant time period divided by the present value of taxable payroll over that period (after adjustments for the initial trust fund balance and target balance at the end of the relevant time period). The actuarial balance is the present value of revenues minus the present value of costs divided by the present value of taxable payroll over that period.
The actuarial measures presented here can be compared with the Medicare trustees’ projections for the HI trust fund.25 CBO and the trustees both project that the trust fund will fail to achieve the target trust fund balance (one year’s worth of outlays) by the end of the 75-year projection period. The trustees estimate that an income-rate increase of 3.9 percentage points would be necessary, a rate more than 2 percentage points lower than CBO’s projection. The difference arises largely because the trustees assume a lower rate of excess cost growth. In particular, they assume that such growth will decline gradually from the 25th through the 75th year of the projection period so as to produce a 75-year (2009 to 2083) actuarial balance that is consistent with one generated by using an excess cost growth assumption of 1 percentage point for each year.
Slowing the Growth of Health Care Costs
The analysis underlying some of CBO’s long-term projections—those made under the extended-baseline scenario—by design keeps federal law unchanged. (By contrast, projections under the alternative fiscal scenario incorporate a change to Medicare law regarding payment rates for physicians’ services.) However, current law leads to unsustainable outcomes for the federal budget and the overall health care system. In December 2008, CBO released two volumes that are intended to assist the Congress as it contemplates possible changes—both large and small—to federal health programs and the nation’s health insurance and health care systems:
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Key Issues in Analyzing Major Health Insurance Proposals provides extensive background information and explains how CBO would approach the analysis of numerous issues that could arise as the Congress seeks to enact major changes in the health insurance system. Because such proposals generally focus on options for providing coverage to and reducing costs for the nonelderly population, their direct effects on federal health care spending would probably be through changes to Medicaid. Even so, options that would reduce spending for Medicare could be used to offset the federal government’s costs for expanding health insurance coverage and could have broad effects on overall health care spending. |
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Budget Options, Volume 1: Health Care presents 115 discrete options that encompass a broad array of issues related to the financing and delivery of health care. The volume includes some options that would reduce spending and others that would increase it together with changes that would reduce or raise revenues. Chapters specifically related to federal spending for health care include those on changes in the availability of health insurance that could be carried out through existing federal programs, the quality and efficiency of health care, the financing of and payments for services provided by Medicaid and the Children’s Health Insurance Program, premiums and cost sharing in federal health care programs, and options for closing the gap between Medicare’s spending and its receipts. |
National health expenditures in 2007 totaled 16.2 percent of GDP. However, the concept of “total spending for health care” used in this report comprises spending for health services and supplies as defined in the national health expenditure accounts maintained by the Centers for Medicare and Medicaid Services. That spending includes all expenditures on personal health care, governments’ administrative costs and public health activities, and the net costs of private health insurance. It excludes two categories of spending that are part of national health expenditures: amounts invested in research and in structures and equipment.
Those figures are net of premiums paid by Medicare beneficiaries and amounts paid by the states representing part of their share of the savings from shifting some Medicaid spending for prescription drugs to Part D of Medicare.
Some of those classified as having employment-based insurance will also have directly purchased coverage.
Out-of-pocket payments do not include the premiums that people pay for health insurance because premiums fund the payments that insurers provide, which are already included in the measure of private spending.
Certain other drugs are also covered under Part B, including oral cancer drugs if injectable forms are available, oral antinausea drugs that are used as part of a cancer treatment, and oral immunosuppressive drugs that are used after an organ transplant.
The standard premiums are set each year to cover 25 percent of projected average expenditures under Part B. For 2009, the standard monthly Part B premium is $96.40. Since 2007, higher-income beneficiaries have been required to pay higher premiums. For 2009, the income thresholds at which people are responsible for paying those higher premiums (which will be indexed for inflation in future years) are annual income of more than $85,000 for single individuals and income greater than $170,000 for couples. CBO estimates that about 5 percent of beneficiaries will pay the higher premiums in 2009. However, because of low inflation, most beneficiaries’ premiums will remain at $96.40 through 2012, CBO projects. (See “Effect of a Zero Social Security COLA on Part B Premiums in Medicare,” CBO Director’s Blog, April 23, 2009, www.cbo.gov.)
Mandatory spending does not require annual appropriations, and the available funding is not limited. Mandatory Medicare spending includes the cost of benefits and certain administrative activities, such as those for combating fraud. Discretionary Medicare spending includes the costs of operating the program, which cover administration, research, and claims processing.
“Other professionals” include physician assistants, nurse practitioners, psychologists, clinical social workers, and physical, occupational, and speech therapists. “Outpatient ancillary items or services” include durable medical equipment, Part B drugs, laboratory services, and ambulance services.
Medicare Payment Advisory Commission, A Data Book: Healthcare Spending and the Medicare Program (June 2008), p. 61. Some low-income or medically needy individuals who are eligible for Medicare are also eligible for some level of assistance from their state Medicaid program. Such assistance may include help in paying for Medicare premiums and cost sharing as well as the coverage of benefits not offered under Medicare.
See Kaiser Commission on Medicaid and the Uninsured, Medicaid Enrollment and Spending by “Mandatory” and “Optional” Eligibility and Benefit Categories (Washington, D.C.: Henry J. Kaiser Family Foundation, June 2005), p. 11.
The enrollment figure of 62 million includes anyone who was enrolled in Medicaid at any time during 2008. Average monthly enrollment during that year was about 50 million.
See Congressional Budget Office, Technological Change and the Growth of Health Care Spending (January 2008).
The effect of general inflation is removed from excess cost growth because the growth of spending for health care is measured relative to the growth of per capita GDP, both of which are affected by general inflation.
For details of CBO’s computations of excess cost growth, see Congressional Budget Office, “Computing Historical Excess Cost Growth,” Appendix B of The Long-Term Outlook for Health Care Spending (November 2007).
In contrast, for its projections of Medicare’s spending, CBO takes into account the projected life expectancy (time until death) of beneficiaries as well as their age and sex. For details, see John Sabelhaus, Michael Simpson, and Julie Topoleski, Incorporating Longevity Effects into Long-Term Medicare Projections, Congressional Budget Office Technical Paper 2004-02 (January 2004).
That methodology for Medicaid is consistent with the way CBO projects its spending, in that CBO separately accounts for projected changes in the numbers of different types of beneficiaries. The introduction of Medicare’s Part D drug benefit in 2006 resulted in a one-time shift in some spending from Medicaid to Medicare. To adjust for that shift, CBO set excess cost growth in 2006 for both Medicare and Medicaid to equal the average of excess cost growth in the two programs for that year.
For the sake of simplicity, CBO assumed that the projected growth of health care spending would have no effect on the future growth of GDP.
CBO assumed that future Medicare spending would not be affected by the provision of current law that requires the Medicare trustees to issue a “Medicare funding warning” if projected outlays for the program exceed 45 percent of “dedicated financing sources”—because the law does not require the Congress to respond to such a warning by enacting legislation that would reduce Medicare spending.
See Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook (March 2009).
For its projections, CBO assumed that the share of health care spending constituting premiums for employment-based plans—which receives preferential tax treatment—would be a constant percentage of non-Medicare, non-Medicaid health care spending.
For the alternative fiscal scenario, CBO used the option titled “MEI [Medicare economic index] Update Through at Least 2019,”option, which is described in “Estimated Changes in Net Federal Outlays from Alternative Proposals for Changing Physician Payment Rates,” www.cbo.gov/doc.cfm?index=9055.
For example, consider the simplified example of two coworkers with incomes of $20,000 and $80,000 who both get a 10 percent salary increase and devote their extra income to an increase of $5,000 in health insurance premiums. The lower earner’s income would increase by $2,000, but his or her health care costs would be $3,000 higher than that, forcing a real reduction in his or her consumption of other goods and services. The higher earner’s income would increase by $8,000, more than enough to cover the additional $5,000 in health care expenses.
A more comprehensive measure would be preferable. However, Medicare spending outside of Part A does not have dedicated taxes, and as a result, constructing a summarized measure for the program as a whole would be complicated by the difficulty of incorporating general revenues in the calculations.
Another commonly used metric is the trust fund exhaustion date. CBO projects that the HI trust fund will become exhausted in fiscal year 2017. For its projections of the fund’s outlays, however, CBO assumed that even after the fund was exhausted, benefits would be paid as scheduled.
See Department of Health and Human Services, Centers for Medicare and Medicaid Services, Office of the Actuary, 2009 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (May 12, 2009), p. 65. These numbers refer to the trustees’ intermediate projections; the trustees also produce low-cost and high-cost alternatives.
