The Slowdown in Health Care Spending

September 19, 2013

This afternoon I am speaking at a conference for the economics journal Brookings Papers on Economic Activity. I’ve been invited to discuss a paper by Amitabh Chandra, Jonathan Holmes, and Jon Skinner titled “Is This Time Different? The Slowdown in Healthcare Spending.” (Amitabh Chandra is a member of our Panel of Health Advisers, and Jon Skinner has served on the panel in the past.)

My comments draw on the paper and also on CBO’s work on this interesting and important topic. Regarding CBO’s own work, my presentation (included below) emphasizes the following three points.

Growth in spending for the fee-for-service portion of Medicare has slowed markedly in the past few years—apparently not because of the financial turmoil and recession but because of other factors affecting the behavior of beneficiaries and providers.

My former colleagues Michael Levine and Melinda Buntin conducted a thorough examination of the slowdown in Medicare spending, which CBO released last month. They concluded that the demand for health care by Medicare beneficiaries does not appear to have been measurably diminished by the financial turmoil and recession, and that other factors they were able to quantify explained only a small share of the slowdown. The rest of the paper explores the possible role of factors whose overall impact they did not find ways to quantify.

The slowdown in health care cost growth has been sufficiently broad and persistent to persuade us to make significant downward revisions to our projections of federal health care spending.

This year we’ve described the revisions to our projections of spending for Medicare and Medicaid in The Budget and Economic Outlook: Fiscal Years 2013 to 2022, Updated Budget Projections: Fiscal Years 2013 to 2023, The 2013 Long-Term Budget Outlook, and a February blog post.

Relative to our March 2010 baseline projections, our latest projection of spending in 2020 for Medicare is now $137 billion, or 15 percent, lower for technical reasons, and projected spending for Medicaid is now $85 billion, or 16 percent, lower for technical reasons. (Those figures leave aside revisions caused by enacted legislation and updates to our economic forecast, and focus on the remaining so-called “technical” revisions.) During that period, we also revised down our projection of private health insurance premiums per enrollee in 2020 by about 9 percent.

Despite the recent reductions in our projections of federal health care spending, growth in such spending remains the central challenge in putting the federal budget on a sustainable path.

In our reports on the budget outlook, we devote a great deal of attention to federal spending for the major health care programs, by which we mean Medicare, Medicaid, the Children’s Health Insurance Program, and the subsidies to be provided through insurance exchanges. Federal spending for those programs equaled less than 3 percent of GDP on average during the past 40 years. It is about 4½ percent of GDP in 2013 and, we project, will be about 6 percent of GDP in 2023 and 8 percent in 2038.

In this year’s long-term budget outlook, we reported the shares of that increase over the next 25 years that could be attributed to various factors. The aging of the population explains about 35 percent of the increase, the expansion of insurance coverage under the Affordable Care Act explains about 25 percent, and excess cost growth explains about 40 percent. Even after the expansion of insurance coverage is fully in place, we project that only about one-fifth of federal spending for the major health care programs will finance care for able-bodied nonelderly people; about one-fifth will go toward care for blind and disabled people; and about three-fifths will go to care for other people who are age 65 or older.