Paragon Prognosis OLD

Growing, Growing, (Fiscal Sustainability) Gone

Medicaid, Medicare
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On June 12, the Centers for Medicare and Medicaid Services (CMS) released its annual National Health Expenditures (NHE) report. The report assesses projected growth in health spending between 2023-2032 for Medicare, Medicaid, private insurance, out-of-pocket spending, and sector categories including hospital care, physician and clinical services, and prescription drugs. The report does not paint a pretty picture of our health spending; almost across the board, spending growth rates are up, in some cases shockingly so. Let’s dive into the numbers below, with a focus on one very large figure: the projected $7.7 trillion total NHE in 2032.

Poor Policy and High Inflation Hits Health Sector in 2023

CMS projects overall NHE to be nearly $4.8 trillion in 2023, a 7.5 percent increase over 2022’s $4.5 trillion and an amount representing 17.6 percent of gross domestic product (GDP). Government spending accounted for 48 percent of NHE, a massive $2.3 trillion, while private spending was $2.5 trillion (interestingly enough, the NHE counts government employee health benefits as private spending). Of the government’s share, the federal government picked up $1.5 trillion while state and local governments spent $753 billion. CMS projects Medicare spent over $1 trillion in 2023, while Medicaid expenditures came in at $852 billion. Private health insurance, meanwhile, is projected to have spent $1.4 trillion— $180 billion of that is from “direct purchase” insurance, including Affordable Care Act (ACA) exchange and Medicare supplemental coverage, the rest is employer-sponsored coverage.

The higher private insurance spending belies a critical difference—private insurance spent only $6,838 per enrollee in 2023, compared to $15,689 in Medicare and $9,336 in Medicaid. For per capita spending, private health insurance grew 11.1 percent in 2023, while Medicare grew 8.4 percent and Medicaid grew 5.7 percent. Overall, insurance rates hit a historical high in 2023 of 93.1 percent, in large part due to the enhanced premium tax credits (PTCs) and continuous Medicaid coverage requirements associated with the COVID public health emergency (Paragon has written about how many of these enrollees were not eligible for the program).

The 2023 spending spike was driven by a few sources. First, hospital expenditures grew 10.1 percent in 2023 with just under $1.5 trillion in expenditures, compared to 2022’s 2.2 percent growth and $1.4 trillion in expenditures. Physician and clinical services spending grew 8.4 percent to $959.1 billion, compared to 2.7 percent growth and $884.9 billion in 2022. Prescription drug spending had one of the smaller increases in 2023, growing 7 percent in 2023 to $434.1 billion compared to $405.9 billion in spending and 8.4 percent growth in 2022. Some of these spending increases are from the higher ACA exchange plan PTC costs and the frozen Medicaid rolls (before redeterminations began in the spring of 2023) boosted coverage and spending. It’s also clear that the general economic inflation from the misguided fiscal policy of the past few years finally hit the medical sector in 2023 – because insurance payments for medical care are determined the year before, there’s often a lag between economy-wide inflation increases and health care inflation increases.

2024 and Beyond

According to CMS’ projections, spending growth will moderate. In 2024, CMS projects a little over $5 trillion in spending, a 5.2 percent increase from 2023. Of that, $1.6 trillion would come from private health insurance, $1.1 trillion from Medicare, and a decrease in Medicaid spending to $833.5 billion. The Medicaid decrease is from an expected 11.2 percent drop in enrollment due to state redeterminations, and would result in a projected 10.6 percent increase in per enrollee spending because the Medicaid population is expected to get sicker and older as a result of losing younger, healthier enrollees to redeterminations.

In 2024, spending growth on hospital care (4.6 percent), physician and clinical services (4.9 percent), and prescription drugs (6.8 percent) are all expected to decrease from their 2023 highs. In 2026, with the expiration of the APTCs, CMS expects private insurance enrollment to drop 1 percent. Generally, however, spending growth rates will return to more a more normal 4-6 percent range across categories through 2032.

Highlights of the 2023 National Health Expenditures Report
The Looming Danger

In 2032, U.S. health spending is projected to hit $7.7 trillion, or 19.7 percent of projected GDP. That spending would include $2.2 trillion from private insurance, $1.9 trillion from Medicare, and $1.3 trillion from Medicaid. That assumes the PTCs are actually allowed to expire and that some future Congress doesn’t create more coverage mandates and new or expanded health care spending programs.

I’m not sure what’s scarier: The actual size of that spending, or how some wish to cover this spending exclusively with government funds. Our current spending (a truly massive $4.8 trillion), much less future spending, gives the lie to the “your country is about to find out why America doesn’t have free health care” meme. We could zero out our entire military budget for 2024 and it still wouldn’t pay for Medicaid, much less Medicare, and not even close to what it would cost to insure the entire American public. Trying to cover $7.7 trillion with government funds exclusively, like the left is proposing? Inconceivable without some combination of system-breaking price controls that would ruin the world’s greatest medical innovation ecosystem, economy-breaking taxes that no elected politician wants to vote for, or nation-breaking debt that is unsustainable and unconscionable to put on future generations.

The Solution

Single-payer nightmares aside, our current system is buckling under its own weight as is, and desperately needs reform. Perhaps the greatest issue is that our current system discourages price sensitivity. If that seems counter-intuitive given the prices people still have to pay out of pocket, it may be helpful to remember that the average actuarial value – the percent of costs a health plan is expected to cover – is 83 percent for employer-sponsored insurance, and 88 percent for the average enrollee in an ACA exchange silver plan. It’s not that patients aren’t paying this, but it’s in the form of premiums (and the larger “employer portions” of premiums that are actually still the employee’s money) and taxes, so patients have little control over how their own health care dollars are spent. Patients that have less financial stake in their care don’t shop around for cheaper services and don’t care as much about the quality of those services. This in turn increases prices and spending.

Before the ACA, insurers had stronger incentives to care about prices, since they were the ones paying for most of the care. With the introduction of the Medical Loss Ratio, whereby insurers have to spend 80-85 percent of their revenue on patient care, the incentive has been largely lost – spending more overall means insurer profits grow. Meanwhile, the largest line items in federal and state budgets, Medicare and Medicaid, are literally designed to incentivize performing as many services as possible, with minimal out-of-pocket expenses for beneficiaries (and, outside of a minority of Medicare Advantage plans, no premiums).

Our entire health system is built around racking up as much utilization as possible while geared toward pleasing bureaucratic requirements from either insurers or the government, not patients. Our massive spending doesn’t make us any healthier; it’s estimated that only 11 percent of health outcomes are attributable to health care. Rather than spending our limited resources on an inefficient system that benefits powerful special interests, we should reform our system so that it puts downward, and not upward, pressure on prices and spending. Giving patients more financial control over their care will end up making that care more affordable, as patients shop around and force providers to actually compete on price. Enabling them to shop requires two things: Transparent pricing and competitive options – meaning reforms to reduce the consolidation and monopoly power of health systems. In short, giving patients more power over their money, more options to choose from, and more transparency about the cost of those options will help keep that $7.7 trillion projection from becoming a reality.