20% GDP health care projection raises questions about costs, efficiencies

Health care spending is projected to increase as a percentage of the U.S. gross domestic product from 17.4% in 2013 to 19.6% in 2024, according to a report released Tuesday by the Office of the Actuary in the Centers for Medicare & Medicaid Services.

The projection could lead to as many questions as it does answers.

For example, Dr. Greg Bledsoe, the state’s surgeon general, said that while people across the ideological spectrum are concerned about spending growth, no one has ever defined the right amount.

“Everyone says, ‘Well, it’s 20%,’ and one of the reasons why it’s 20% is we have a very innovative health care system,” he said. “If we drop that to 18% or 15%, does that solve the problem of the health care spending? Is that a better target, and if so, what is that going to do to the innovation within the health care system?”

National health spending in 2014 is projected to have reached $3.1 trillion, or $9,695 per person, an increase of 5.5% from 2013. Health spending growth in the United States is projected to average 5.8% annually from 2014–24, reflecting the Affordable Care Act’s coverage expansions, faster economic growth, and the aging population, the report states. Health care spending will grow 1.1% faster annually than the gross domestic product during this time period.

The percentage of national health care financed by federal, state and local governments will increase from 43% in 2013 to 47% in 2024. About 19.1 million additional people are projected to enroll in Medicare during the next 11 years. Medicaid spending is projected to have increased 12% in 2014 because of a 12.9% increase in total enrollment – 7.6 million beneficiaries – under the Affordable Care Act.

Bledsoe, who is a nonvoting member of a legislative task force studying overall health care reform in Arkansas, said policymakers need to improve government efficiency and make sure the benefits are only going to those for whom they’re intended.

Dr. Mark Fusaro, associate professor of economics in the Arkansas Tech University College of Business, is skeptical of the projections. He said it’s difficult to project the future in an industry sector that has undergone so much rapid change. Also, the report considered only the demand side of health care, not the supply side.

“Given the number of retirements that we’re getting in the health professions, and the number of new doctors we’re producing, I don’t think we’re going to have enough supply to be able to offer that much health care,” he said.

How will the numbers affect Arkansas’ economy? Dr. Michael Pakko, state economic forecaster, said it’s difficult to extrapolate local data from a national report. Arkansas’ population is slightly older than the national average, so more could be spent on health costs. On the other hand, more Medicare spending on that older population will result in an inflow of resources into the state.

Neither Pakko nor Fusaro wanted to make any value judgments as to whether 20% is too high. Fusaro did say that money spent on health care can’t be spent elsewhere, and that the sector tends to focus on advances that improve care rather than investments that save costs.

“It’s always good to see more people getting the care that they need,” he said. “If that’s where the demand is going, then that’s where the economy should be going, but it’s going take resources away from other areas.”

The news from the report is not all bad. Historically, costs rose an average of 9% in the three decades before 2008. The past six years have seen growth below 5%. The percentage of Americans with insurance is projected to increase from 86% to 92.4% as the number of uninsured Americans drops by 18 million by 2024. Costs in 2014 grew at historically slow levels. Private insurance premium growth is projected to slow to 2.8% in 2015 because forecasters expect a healthier population to enroll in private insurance exchanges and because employers are offering more high-deductible health plans.

For private insurance, per enrollee growth was 5.4%; for Medicare, it was 2.7%; and Medicaid’s per enrollee costs actually fell .8% because new enrollees are expected to be healthier than previous ones. However, new pharmaceutical drugs led to prescription drug spending rising 12.6%, the most since 2002. The report said the share of health expenses paid out of pocket is expected to fall from 11.6% to 10% in 2024.

Bo Ryall, executive director of the Arkansas Hospital Association, said the projections aren’t a surprise, given the health care sector’s fundamentals. He pointed out that Medicare reimbursements to Arkansas hospitals under the Affordable Care Act have been reduced by $3.5 billion over the next 10 years. Meanwhile, hospitals are receiving a smaller amount from the private option – $149 million in 2014 – to help offset the cost.