Federal Spending on Major Health Care Programs Will Surpass $2 Trillion in 2026

Federal Spending on Major Health Care Programs Will Surpass $2 Trillion in 2026

Last week, CBO released its latest Budget and Economic Outlook. In this report, CBO notes that the deficit in 2016 is expected to be $544 billion and federal outlays will rise by 6 percent, to $3.9 trillion, compared with 2015. Mandatory spending—such as that for entitlement programs like Social Security, Medicare, and Medicaid—will rise $168 billion this year. Federal spending on major health care programs will account for the largest portion of this rise as federal outlays for Medicare, Medicaid, exchange subsidies, and the Children’s Health Insurance Program (CHIP) will increase $104 billion (11 percent) in 2016. Last year was the first that federal spending on these programs surpassed $1 trillion and in 10 years federal expenditures for these programs will be more than $2 trillion. It is important to keep in mind this does not account for state spending on health care, which was nearly $200 billion in 2014 for Medicaid and $3.9 billion for CHIP. When state spending is added to these totals, spending on Medicare and Medicaid alone will reach $2 trillion in 2023. States have been spending roughly a quarter of their budgets on Medicaid for years now, and soon the federal government will be spending roughly a quarter of its budget on health care programs (as shown by the yellow line in the chart below).

Big Benefits could come from Small Changes to Flexible Spending Accounts

One little-known provision of the Affordable Care Act (ACA) surreptitiously penalizes a select group of people – employees who, or whose dependents, require significant levels of health care of types not covered by insurance. This group includes families with children who have certain types of special needs, people with Type I (“juvenile”) diabetes, people with disabilities, and even families with children requiring orthodontic treatment. Also affected are employees facing higher deductibles and co-payments – both of which are encouraged by other provisions of the ACA.

The Daily Dish

According to the Hill newspaper former Obama Administration Secretary of State and current presidential hopeful Hillary Clinton made the case about the damaging impact of the Affordable Care Act (ACA) on incentives for full-time employment: “Well that’s why they’re going to part-time, that and also the Affordable Care Act (ACA)…” This concern emanates from an unlikely source, but reflects the incentives created by the employer mandate to provide affordable health insurance and the ACA’s choice of 30 hours as the definition of full-time work. (These are concerns above and beyond the Congressional Budget Office’s (CBO’s) conclusion that the ACA has cost the U.S. economy 2 million jobs or, more generally, the CBO conclusion that "Repeal of the ACA would raise economic output, mainly by boosting the supply of labor; the resulting increase in GDP is projected to average about 0.7 percent over the 2021–2025 period.”)

The Daily Dish

Medicaid — the joint federal-state program to provide health insurance coverage to the low income and disabled populations — is now over 50 years old. The federal government pays from 50 percent to 74 percent of a state’s base Medicaid expenses; the fraction paid is known as the Federal Medical Assistance Percentage (FMAP). In addition, Medicaid expansions are a core part of the Affordable Care Act (ACA). In those states that opted to expand Medicaid (and 17 did not), the federal government is picking up 100 percent of the tab in the near term, and 90 percent of the expansion cost over the long term. The attention paid to Medicaid expansions likely also increased the enrollment of those already eligible for the base program — a phenomenon known as the “woodwork effect."

Medicare Beneficiaries Using More Appropriate Care Settings

Medicare Beneficiaries Using More Appropriate Care Settings

As policymakers look for ways to “bend the health care cost curve,” proposals inevitably focus on various methods to increase use of more efficient/higher-value products and services. This may include the use of cheaper and/or more effective services, or the use of more appropriate care settings (i.e. not going to the emergency room for non-emergent care). While total spending per beneficiary has not declined, data shows that over the last decade or so, there has been a noticeable shift in where Medicare beneficiaries receive care, and it points in the right direction.  Spending on inpatient hospital services, as a percentage of total spending per Medicare beneficiary, decreased 26 percent between 1999-2012.  At the same time, spending on outpatient hospital services increased 71 percent and spending on home health care increased 12 percent. While spending on hospice care in 2012 was still only 4 percent of total spending per beneficiary, that is nearly triple the share of spending on hospice in 1999. With 10,000 baby boomers retiring each day and beneficiaries living longer, it is imperative that we continue to build upon this trend of treating individuals in the most appropriate setting.

National Health Expenditures in 2014 Grew at Fastest Pace Since 2007

National Health Expenditures in 2014 Grew at Fastest Pace Since 2007

National health expenditures surpassed $3 trillion for the first time in history last year, with the U.S. spending an average of $9,523 per person in 2014. Total expenditures grew 5.8 percent from 2013—the fastest rate of growth since 2007. An increase in the number of individuals with private insurance and large increases in the number of individuals enrolled in Medicaid contributed to the growth in spending, along with the use of new pharmaceutical treatments; prescription drug spending increased 12.2 percent. The net cost of health insurance increased 12.4 percent—the second time since 2009 that the net cost of insurance has grown by double digits in a single year. With the implementation of hundreds of new health care regulations, the cost of health insurance has grown 41 percent from 2009 to 2014. Spending on hospital care increased 4.1 percent last year and spending on physician and clinical services increased 4.6 percent. The chart below shows the growth in health care expenditures, by category, for each year since 2009. During this period, health expenditures per capita have grown 1.1 percent faster than gross domestic product (GDP) per capita.

The Daily Dish

I once had an academic colleague who wrote a paper on taxes and the timing of births. A baby born on December 31, 2015, for example, entitles the parents to one more dependent exemption in 2015. A baby born one day later on January 1, 2016 does nothing to reduce taxes in 2015 and has the same impact on 2016 and thereafter. The win goes to December 31. To the extent that the date of birth is controllable — e.g., planned c-sections — it would make sense to pick December 31 over January 1. Half of her paper was a theoretical justification for the timing of births being influenced by taxes, while the remainder was an examination of the data. If births simply happened randomly, one would expect an equal distribution across Sunday-Saturday. Sure enough, the birth statistics in the National Vital Statistics System (NVSS) showed a spike up in births on December 30 and 31and a corresponding valley on January 1 and 2. (There is also a relative valley on every Saturday and Sunday; Ob-Gyns like their weekends too.)

IPAB: Not the Solution to Health Care Spending Growth

Aware of the unsustainability of rising health care spending, policymakers have sought to implement myriad policies and programs aimed at reducing such spending growth. One such attempt is the Independent Payment Advisory Board (IPAB) authorized under the Affordable Care Act (ACA). However, IPAB’s statute limits its ability to achieve long-term success. For example, requiring all savings to be achieved in a single year will likely cause disruptive changes to the Medicare program. The restrictions imposed on IPAB leave it little authority to make changes except to Medicare Advantage (MA) and Part D—the only parts of Medicare that necessarily must work to improve care and reduce costs because of their competitive nature—or to provider reimbursement rates, which will likely restrict access to care. IPAB is not likely to be successful in sustainably reducing health care costs without having harmful effects on Medicare beneficiaries.

Reimbursement Policy for Biosimilars Will Have Negative Consequences for Patients

The Centers for Medicare and Medicaid Services (CMS) have finalized a rule regarding the Medicare reimbursement methodology for biosimilar products. Biosimilars are prescription medications which have been approved by the Food and Drug Administration (FDA) as being “highly similar” to a specific biologic medication (known as the reference product).  Thus, it is easiest for most people to think of biosimilars as the equivalent of generics for small molecule brand name medications, though this is not scientifically accurate. While small molecule generics are chemically identical (save for potentially any inactive ingredients) to their respective brand name drugs—and can be because they are chemically manufactured—exact copies of biological products, by their nature of being developed from living organisms, cannot be produced,  and patients may respond differently to the reference product and the biosimilars.

Still Marked by Uncertainty: 2016 Health Insurance Marketplace

Still Marked by Uncertainty: 2016 Health Insurance Marketplace

Nearly two years ago, the Affordable Care Act (ACA) implemented a new individual insurance marketplace, along with the promise of stability and affordability. The new individual marketplace was to rival that of the employer sponsored insurance (ESI) marketplace in stability and predictability, while premiums were to rise at rates much lower than the historical average.

The Daily Dish

Of disappointment. Remember when ObamaCare was going to be like Travelocity — a pleasant e-shopping experience where you got exactly what you wanted the very first time. Not so much. Remember when it was going to “bend the cost curve” so that health care got cheaper, the entitlement spending threat miraculously disappeared, and employer health care costs did not rule out the chance of getting an actual cash raise? Not so much.

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