New Report on Health Care Costs Should Provide Focus for Secretary Price

Policy Memo
Tuesday, February 21, 2017

In the release of their annual projections for National Health Expenditures (NHE), the federal government's chief health care actuaries see the sector growing to represent one-fifth of the entire economy by 2025 (up from 18 percent in 2016). Understanding this growth and how to moderate it should be front-and-center for newly confirmed Secretary of Health and Human Services Tom Price.

Over the period of 2016-2025, the actuaries expect NHE to grow by an average of 5.6 percent a year, about 1.2 percent faster than the expected growth of the economy over the same time period. 

The year 2016 itself actually saw a slight decline in the growth rate. Its 4.8 percent growth was the result of a slowdown relative to the prior two years, when new coverage under the Affordable Care Act (ACA) was phased in and there was a related increase in the usage and intensity of health care services. 

However, the actuaries expect the growth rate to pick up over the projection period as the population ages, making more people eligible for Medicare and Medicaid, and as health care prices rise faster than prices in the overall economy. The two pieces of health care spending that will grow the fastest are home health care and prescription drug spending, both growing at over 6 percent annually.

In 2016, on a per-capita basis, Medicare and Medicaid grew slowly at 1.6 and 1.1 percent respectively, following the below-average growth trend of the last few years. By 2019, the actuaries expect this growth to pick back up to just over 4 percent growth annually.

Keeping the per-capita growth rate down should be the focus of the Trump administration and Secretary Price. Unfortunately, there are concerning signs on that front. Prior to being confirmed, Price spoke out in opposition to one of the most promising Medicare cost-control models -- paying for health care services in “bundles” of care. While implementation has been temporarily delayed because of the start of the new administration, it will be crucial for the secretary to allow the bundled payment initiatives to proceed.

The other concerning sign is that as part of the debate over whether, when and how to repeal and replace the ACA, Price has focused on ways to reduce Medicaid spending by simply limiting the federal government’s contribution to the health insurance program and not by slowing the growth of per-capita costs.

We should soon see, in its ACA reform plans and President Trump’s first budget, what actions the new administration proposes to deal with the cost growth projected by the actuaries. This will be an important marker for how serious the administration will be about tackling a factor behind the largest programmatic driver of the long-term fiscal challenge.