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Essential IR Insights Newsletter - February 2023

US healthcare spending to accelerate over a decade, agency predicts

Driven in part by wage growth and ever-increasing prescription drug prices, U.S. healthcare spending is expected to rise more rapidly over a decade than it did in the last eight years, according to projections by the federal agency that oversees the government's health insurance programs.

Spending on a range of products and services from medicines to hospital care will increase on average by 5.5% a year, which is 1 percentage point faster than the overall economy, Gigi Cuckler, a senior economist at the Centers for Medicare and Medicaid Services' Office of the Actuary, told reporters on Feb. 14.

The increase in healthcare spending will outstrip the 4.2% average yearly increase the nation saw between 2008 and 2016, according to the economists. However, spending will probably rise more slowly than the 7.3% average annual increase between 1990 and 2007.

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By 2026, healthcare expenditures will make up 19.7% of the nation’s economy, up from 17.9% in 2016, according to the projections scheduled to be published in the policy journal Health Affairs.

The government will be paying more of those costs a decade from now, the agency's economists said. More aging Baby Boomers are moving from private health plans to Medicare, the government insurance program for people 65 and over, driving Medicare spending up to an average of 7.4% a year, greater than the 4.7% annual increase predicted for private health plan outlays.

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As a result, the agency's economists projected that federal, state and local governments will be paying 47% of the nation’s healthcare costs by 2026, up from 45% in 2016.

Meanwhile, the share picked up by businesses, households and other private sources is expected to dip to 53% by 2026 from 55% in 2016.

Due in part to the repeal of the Affordable Care Act’s requirement that everyone obtain insurance or pay a tax penalty, dubbed the individual mandate, the agency is also predicting that 8.4 million more people will be uninsured in 2026 than in 2017.

The increase in the number of uninsured, to 37.7 million in 2026, would mean 89.3% of Americans will have coverage in 2026, down from 91% in 2017.

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In the short term, prescription drug prices are expected to grow by 4.4% in 2018, compared to 2.1% in 2017. Fewer brand-name medicines will lose patent protection in 2018 than in previous years, meaning less competition from cheaper generic drugs. The economists' projection didn’t factor in changes that could come from President Donald Trump’s pledge to lower drug prices in his state of the union address as well as policies in his proposed budget Feb. 12.

Over the decade, prescription drug spending is projected to increase by 6.3% annually, the economists said. Rebates on drug prices, which have somewhat moderated costs, will not increase as rapidly as they have in the past. With the impact of the rebates leveling off, an expected surge in more expensive medicines that require special handling or packaging drive up the overall spending on drugs, the economists said.

In addition, economists predicted the cost of medical goods and services will play a greater role in fueling healthcare outlays, a reversal of the last few years when increased usage drove up spending.

Overall healthcare prices rose by only 1.1% from 2014 to 2016, due to the sluggish economy. But the government economists project it will rise by 2.7% annually between 2021 and 2026.

Costs associated with the use of products and services as more people obtained insurance rose by 2.8% annually between 2014 and 2016. But as employers do more to manage healthcare costs and the repeal of the individual mandate reduces the percentage of the insured, costs associated with increased health care use is expected to rise by 1.7%.

Though the government economists didn’t mention it as a factor in their projections, the House Energy and Commerce oversight and investigations subcommittee on Feb. 14 expressed concern that an increase in hospital mergers and other consolidations in the healthcare industry is driving up spending.

"The increasing costs of healthcare are ultimately passed along to American workers and families. This trend is concerning for all Americans and is an issue the committee will continue to examine," subcommittee chairman Gregg Harper said in his opening remarks.

"While there are numerous factors contributing to the rising costs of healthcare, reports and studies show consolidation is a contributing factor," he said.