CMS and CBO consistently overestimated the growth in health care spending

National Health Expenditure Projections, 2022–31: Growth To Stabilize Once The COVID-19 Public Health Emergency Ends, Health Affairs,

National health expenditures are projected to have grown 4.3 percent in 2022, slower than nominal gross domestic product (GDP) growth of 9.2 percent, leading to a decrease in the projected health spending share of GDP from 18.3 percent in 2021 to 17.4 percent in 2022.¹ However, over the course of the full projection period, 2022–31, health spending is expected to grow, on average, 5.4 percent per year, outpacing projected average growth in nominal GDP of 4.6 percent per year and resulting in a health spending share of GDP of 19.6 percent by 2031.

As you can see in the chart above, the healthcare growth estimate for expenses is hovering around 17-18%. As Merrill will explain, this has not been the case in the past and pre-Covid. Every time a high forcast is made, people begin looking for reason to cut back or control costs.

Why do the health economists keep getting it wrong?, GoozNews, Merrill Goozner. 

For more than a decade, CMS and CBO consistently overestimated the growth in health care spending, which undermines efforts to spend more on health-related social needs.

Earlier today, economists at the Centers for Medicare and Medicaid Services released their annual projection for health care spending over the next decade. After noting that spending fell to 17.4% of gross domestic product in 2022, which is about where it’s been for most of the past decade except during the Covid years, they predicted spending by Medicare, Medicaid, private insurance and other public and private entities would once again resume its upward trajectory this year and reach nearly 20% of GDP by 2031.

Hmmm. Where have I heard that before? I keep a file containing past CMS projections so it was fairly easy for me to check. The earliest article in my file dates from February 2008, when health care made up 16% of the overall economy. That year, CMS predicted spending would reach 20% of GDP by 2017.

Let’s go to the videotape. Seven years after President Obama and the Democratic Congress passed the the 2010 Affordable Care Act, which included numerous provisions aimed at reining in health care spending, it had only reached 17.7% of GDP.

The CMS prognosticators during the first year of the Trump administration didn’t do much better. In 2017, they predicted healthcare would reach nearly 20% of the economy by 2025. Now they’re saying it won’t reach that level until 2031.

To be fair, healthcare spending did spike to nearly 20% of GDP in 2020. But that was only because the pandemic dramatically slowed overall economic activity while the government poured cash into hospitals and physician offices to keep them running. It took only two years for it to fall back into the 17-18% of GDP range as the economy recovered and the stimulus was withdrawn.

One could conduct a similar exercise with healthcare spending projections from the Congressional Budget Office. Fortunately, I don’t have to do the calculations because Sen. Sheldon Whitehouse (D-RI), chairman of the Senate Budget Committee, asked CBO director Phillip Swagel that very question.

Swagel replied in a letter earlier this year that CBO overestimated mandatory spending for health care in the 2010–2020 period by 9%. “Most of the overestimate for the Medicaid and Medicaid programs stemmed from an overestimate of spending per beneficiary, not an overestimate of the number of beneficiaries,” he wrote.

This systematic overestimation of future health care costs by government economists has far-reaching consequences. When CMS gets it wrong, organizational planners around the country are given a faulty notion of how much money will be flowing through the system, which could lead to a misallocation of resources.

When CBO gets it wrong, Congresspersons get a faulty notion of what resources are available to spend on other programs. It also feeds the GOP’s hysteria around balancing the budget, which undermines political support for other social programs, including those that would actually improve the health of the nation.

Does greater spending on health matter?

I’m not saying we shouldn’t care how much of society’s resources healthcare consumes. Let’s look at the question first from the consumer/taxpayer/employee perspective.

Health care is a social good that we’d all rather avoid. No one wants to get sick. But sickness is part of the human condition and a drain on society. That’s why every country devotes a substantial share of its economy to preventing and curing illness, although no country on earth comes even close to what the U.S. spends.

Yet the U.S. gets far less for its spending than other countries. Longevity has been falling for several years. Our infant and maternal mortality rates are a national disgrace. Nearly 30 million of our fellow citizens do not have health insurance, the only advanced industrial country without universal coverage.

And, it is not as if we’re consuming more services. We don’t. As health care consumers, we’re paying the highest prices in the world for an inferior product. We can transplant organs and cure rare diseases, but are incapable of responding to a public health crisis (1.16 million dead from Covid, by far the highest number in the world). Nor have we managed to address the chronic conditions that are driving the downward spiral in longevity like uncontrolled obesity, hypertension and substance abuse.

Spending more on health care isn’t good for economic growth except in the narrowest sense. The sector employs tens of millions. Indeed, it has become the biggest employer in many cities and town. But that is economic activity that could be directed elsewhere.

Why do I say that? It is important to remember that everyone pays for health care through taxes and wages. Taxes pay for Medicare and Medicaid. Your wages pay for employer-provided health insurance, which is money that could otherwise go into your paycheck or into retirement savings or other benefits. Money spent on health care is money that can’t go to pay for other good and services, which very often are the very items that would create a healthier society like better housing, better food and greater economic security.

It is possible that health care spending in the coming decade will grow to nearly 20% of GDP as a share of overall GDP. The demographics of an aging society are real. Most drug prices, especially those new to market, will continue to rise given the power of Big Pharma. The share of resources flowing to hospitals and physician practices will remain steady.

The result, should that come to pass, will be a health care sector that continues to consume a disproportionate share of the nation’s resources while the broader society’s health continues to deteriorate. What I would rather see is a society where the health care sector’s share of the nation’s resources starts to shrink; we spend more on the social services and social goods that promote good health; and people once again are living longer, happier and healthier lives.