Healthcare spending to top $7.1 trillion

The United States’ sky-high healthcare spending is only projected to increase over the next several years to top $7.1 trillion by 2031, according to the latest National Health Expenditure (NHE) analysis from CMS.    

Despite efforts to control the cost trajectory via value-based care and new prescription spending rules for Medicare, the nation’s healthcare expenditures will still grow at an average of 5.4% per year and account for more than 20% of the national economy by the start of the next decade. 

Key takeaways from this year’s projections include: 

• Medicare is likely to experience an average annual growth rate of 7.5%, outpacing Medicaid and private insurance. While spending growth slowed down at the end of the pandemic, the rate is anticipated to temporarily increase to 8.9% in 2025 due to the $2,000 out-of-pocket drug spending cap in the Inflation Reduction Act (IRA) and the shifting of excess drug costs back to the Medicare program.
  Spending will slow again to 6.8% in 2030 and 2031 as the IRA begins to have its intended impact on drug prices – and the last of the Baby Boomers finish enrolling in the program. 
• Medicaid expenditures will grow by 5% over the 2022-2031 time period, despite expected enrollment reductions of around 8 million beneficiaries as states continue to purge their rolls after pandemic protections expire. Enrollment increases are anticipated to average only 1% through 2031, despite the forecast for an acceleration in average expenditure rates between 2025 and 2031. 
• The end of the pandemic has brought some relief to private health insurance plans.  Even with higher enrollment rates in 2022, commercial health plans only saw spending increases of 3% that year, compared to 5.8% in 2021. However, faster projected growth in service utilization and overall health care prices in 2023 will likely lead to a 7.7% increase in private health insurance spending by 2031.
• Hospital spending is expected to be a major growth driver, averaging 5.8% for 2022-2031. In comparison, spending on physician and clinical services will rise 5.3%, while prescription drug spending will only increase by 4.6% over the target time period.
  Unsurprisingly, the pandemic has played havoc with hospital spending trends, creating artificially low growth rates in 2022 due to dramatically higher utilization in 2020 and 2021. However, in 2023, a more typical increase in hospital use, as well as rapidly rising prices due to inflation and labor costs, will lead to a 9.3% spike. The rates will even out again beginning in 2025, with projected average annual growth of 6.1%. 
• Prescription drug spending will be affected by a number of variables, including the impact of the IRA and a decline in Medicaid enrollment. CMS expects to see total expenditures grow at an average annual rate of 4.6% through 2031, with slower growth in the short term due to the elimination of 5% coinsurance in the catastrophic phase in Part D which will lower out-of-pocket spending. The removal of 8 million Medicaid beneficiaries will also produce declines in Medicaid drug spending.   

However, longer term spending will speed up again to average 4.8%, balancing out immediate gains as Medicare absorbs more patient out-of-pocket costs and enhances Part D benefits due to IRA provisions.   

For health plans, the greatest cost reduction opportunities may lie in leveraging technology to produce administrative efficiencies that save on labor costs and combat inflation, as well as continuing to reduce avoidable spending on high-cost hospital services. 

For example, plans may wish to focus adopting artificial intelligence tools to improve their administrative data management infrastructure, including technologies to further streamline prior authorizations and automate other aspects of claims processing. Continuing to improve data interoperability between plans and providers will also be important to support faster and more accurate decision-making so that patients receive the right level of care at the right point in their health journey. 

The full 2023 NHE Projections report, including data tables, is available by clicking here. 

Jennifer Bresnick is a journalist and freelance content creator with a decade of experience in the health IT industry.  Her work has focused on leveraging innovative technology tools to create value, improve health equity, and achieve the promises of the learning health system.  She can be reached at jennifer@inklesscreative.com.