Federal Reform Seen Having Moderate Impact on Health Spending

U.S. health spending is projected to reach nearly $4.6 trillion by 2019, growing at an average annual rate over the next decade of 6.3 percent, according to economists at the Centers for Medicare and Medicaid Services (CMS).

By 2019, health care is projected to account for nearly one of every five U.S. dollars spent, or about 19.6 percent of the gross domestic product, 0.3 percentage points higher than anticipated before reform.

“In the aggregate, it appears that the Affordable Care Act will have a moderate effect on health spending growth rates and the health care share of the economy,” says Andrea Sisko, lead author of the study and economist at CMS.

At the same time, she points out that “differences in spending patterns, by year and by payer, reflect reform’s many major changes to health care coverage and financing.”

The report provides an initial estimate of spending brought about by the new and expanded administrative roles for the federal and state governments under health reform (inclusive of HHS, state exchanges—startup and operating expenses—and Medicaid) pegging the cost at a total of $71.1 billion.

In addition to examining the effect of national health reform legislation, the report also estimates how other recent laws and regulations may impact health spending this year and beyond. These include changes to COBRA premium subsidies and Medicare physician payment rates.

National Health Expenditures:

• Health spending in 2010 is projected to reach $2.6 trillion and account for 17.5 percent of GDP, up 0.2 percentage point from pre-reform estimates. This growth is driven in large part by the postponement of cuts to Medicare physician payments and legislative changes to COBRA premium subsidies.
• In 2011, public and private health spending is expected to grow more slowly as reductions in Medicare physician payment rates (including a 23-percent reduction in December of 2010) come into effect and COBRA premium subsidies expire.

• Health spending is projected to rise significantly in 2014 when health coverage is expanded to millions of uninsured Americans. Expanded coverage means overall spending is expected to increase by 9.2 percent, significantly higher than the 6.6 percent rate put forward in February. Public spending is projected to increase by 9.7 percent in 2014, while private spending is anticipated to increase by 8.6 percent.

• With more people insured in 2014, out-of-pocket spending is projected to decline by 1.1 percent instead of rising 6.4 percent as initially expected.
• From 2015 through 2019, national health expenditures are projected to grow at an average annual rate of 6.7 percent, slightly less than the pre-reform projection of 6.8 percent. CMS analysts attribute this to a reduction in Medicare spending growth, which is projected to be 1.4 percentage points lower than pre-reform estimates.

Government Administration Spending:

• The new administrative function for health reform at HHS is projected to cost $2.4 billion between 2010 through 2019. Separate federal and state outlays to create and operate the Health Insurance Exchanges are estimated to cost $37.7 billion. Medicaid administration costs at the state and federal level are projected to increase by $31 billion over the same period.

Health Insurance Enrollment:

• CMS estimates that nearly 93 percent of people will be insured by 2019, a level that is roughly 10 percentage points higher than the share of the population that was expected to be insured without the passage of national reform. More than half of the estimated 32.5 million newly insured people are expected to gain coverage through Medicaid. Enrollment in Medicaid and the Children’s Health Insurance Program is projected to increase by 21.8 million in 2014 to 85.2 million people.

Highlights by payer:

Private Health Insurance

• COBRA-related changes are projected to result in an additional 1.6 million insured and an additional $15.4 billion in spending by private health insurance in 2010. As a result, private health insurance spending is expected to grow 4.3 percent for 2010, higher than the 2.5 percent projected in February.
• The expiration of subsidized COBRA coverage and a decline in private health insurance enrollment and spending growth due to high unemployment is expected to drive down the rate of growth in private health insurance spending in 2011, CMS says. Spending is anticipated to grow just 2.2 percent in 2011, slightly more than half of what was projected in February.
• In 2014, private health insurance spending is expected to rise steeply as a projected 15.8 million people obtain private health insurance coverage through Health Insurance Exchange plans. Spending growth is expected to be 12.8 percent, more than double what CMS projected in February. By 2019, private health insurance spending is anticipated to account for about 32 percent of national health spending.

Out-Of-Pocket Spending

• Slower growth in out-of-pocket spending is projected for 2010 as more people retain private health insurance through subsidized COBRA coverage (1.1 percentage points slower than previously estimated). In 2011, as the subsidies expire, out-of-pocket spending is expected to grow at the slightly faster rate of 3.1 percent.
• Out-of-pocket spending is projected to fall as the uninsured acquire health insurance coverage either through the expansion of Medicaid or exchange plans. As a result, out-of-pocket spending in 2014 is expected to decline 1.1 percent, compared to the pre-reform projection of a 6.4 percent increase.
• Out-of-pocket spending is expected to also grow slower than anticipated until 2017. When the excise tax on high-cost employer-sponsored plans takes effect in 2018, out-of-pocket spending is projected to grow at a rate of 9.6 percent, four percentage points faster than what CMS projected in February.

Medicaid and CHIP

• By 2019, Medicaid and CHIP expenditures are projected to represent nearly 20 percent of national health spending, up from nearly 18 percent in the pre-reform estimate. Expanded Medicaid eligibility beginning in 2014 is projected to increase spending by 17.4 percent in 2014 to $634.1 billion, 11.1 percentage points faster that estimated prior to reform.

Medicare

• Medicare provisions in the Affordable Care Act are anticipated to result, on net, in much slower Medicare spending growth from 2009 to 2019. Specifically, average annual Medicare spending growth is anticipated to be 1.4 percentage points slower than expected for 2010 through 2019. This is attributable to cuts in Medicare payments to providers and managed care plans. These cuts are estimated to offset spending to gradually close the “doughnut hole”—the coverage gap in the Part D prescription drug benefit.

The projections were reported in a Web First article in the journal Health Affairs. The full report can be accessed at: http://content.healthaffairs.org/cgi/content/abstract/hlthaff.2010.0788