Boom medicare

T R E N D S
TRENDS
Accelerating growth in Medicare spending bythe end ofthe projection
period is the first sign of the coming demographic shift.
by Sean E^eehan, Andrea Sisko, Christopher Truffer, Sheila Smith, Cathy
Cowan, John Poisal, IVi. Kent Clemens, and the Nationai IKIeaith
Expenditure Accounts Projections Team
ABSTRACT: The outlook for national health spending calls for continued steady growth.
Spending growth is projected to be 6.7 percent in 2007, similar to its rate in 2006. Average
annual growth over the projection period is expected to be 6.7 percent. Slower growth in pri-vate
spending toward the end of the period is expected to be offset by stronger growth in
public spending. The health share of gross domestic product (GDP) is expected to increase
to 16.3 percent in 2007 and then rise throughout the projection period, reaching 19.5 per-cent
of GDP by 2017. [Health Affairs 27, no. 2 (2008): wl45-wl55 (published online 26
February 2008; 10.1377/hlthaff.27.2.wl45)]
annually. Although this difference in growth
rates is larger than was observed in 2004,
2005, and 2006 (averaging 0.3 percentage
point), it is lower than the average difference
of 2.7 percentage points over the past thirty
years.-' The differential growth rates are ex-pected
to result in a health share of GDP of 16.3
percent in 2007 and 19.5 percent by 2017—
nearly one-fifth of the economy (Exhibit 3).
Divergent spending trends in pubhc and
private payers' spending, as well as in spend-ing
for specific services and goods, underlie the
stable outlook for overall growth in national
health spending. Although we expect accelera-tion
through 2009 attributable to higher use,
private spending growth is expected to deed-
ATIONAL HEALTH SPENDING
pected to grow 6.7 percent in 2007
and reach $2.2 trillion. Over the pro-jection
period in this paper (2007-2017),
growth is anticipated to remain steady at
around 6.7 percent per year, yielding an esti-mated
$4.3 trillion in health spending in 2017
(Exhibits 1 and 2). Average annual growth for
2005-2016 is 0.2 percentage point lower than
projected previously, mostly due to the ex-pectation
of slower medical price growth.'
Gross domestic product (GDP) growth is
expected to average 4.7 percent per year over
the projection period. Therefore, health spend-ing
growth is expected to outpace economic
growth by an average of 1.9 percentage points
Most ofthe authors are with the National Health Statistics Group (NHSG), Office ofthe Actuary, Centers for
Medicare and Medicaid Services, in Baltimore, Maryland. Sean Keehan (pNHS@cms.hhs.gov) is an economist in
the NHSG. Andrea Sisko, Sheila Smith, and Cathy Cowan are also economists there.]ohn Poisal is a deputy
director ofthe NHSG. Christopher Truffer and M. Kent Clemens are actuaries in the Medicare and Medicaid Cost
Estimates Group. Other members ofthe National Health Expenditure Accounts Projections Team are listed at the
end of this paper.
H E A L T H AFFAIRS - Weh Exclusive
DOI 10.1377/hlthaff.27.2.wl45 C2008 Project HOPE-Thc Ptopk-to-Pcopk Health Eoundation, Inc.
wl45

H E A L T H TRACKING
EXHIBIT 1
National Health Expenditures (NHE), Aggregate And Per Capita Amounts, And Share
Of Gross Domestic Product (GDP), Selected Calendar Years 1993-2017
Spending category 1993 2005 2006 2007' 2008° 2012* 2017"
NHE (billions)
Health services and
supplies
Personal heaith care
Hospitai care
Professionai services
Physician and
clinical services
Other prof, services
Dentai services
Other PHC
$912.6
853.2
773.6
317.2
280.7
201.2
24.5
38.9
16.2
$1,973.3 $2,105.5 $2,245.6 $2,394.3 $3,097.8 $4,277.1
1.843.6 1.966.2 2,095.5 2,234.5
1.653.7 1,762.0, 1,877.6 1,999.1
605.5 648.2 696.7 747.1
2,895.9
2,587.5
977.9
953.3
636.8
80.5
127.4
108.6
4,007.7
3,585.6
1.345.7
1,297.7
840.0
105.0
169.6
183.1
622.2 ' 660.2 701.1 743.1
422.6 447.6 473.0 501.7
56.2 58.9 61.7 65.1
86.6 91.5 96.9 102.4
56.8 62.2 69.6 73.9
Nursing home and
home heaith
Home heaith care''
Nursing home care''
87.3
21.9
65.4
168.7
47.9
120.7
177.6
52.7
124.9
187.3
57.6
129.7
198.5
62.0
136.5
250.1
82.7
167.4
336.5
119.0
217.5
Retail outlet sales of
medicai products
Prescription drugs
Durabie medicai
equipment
Nondurabie medicai
products
Program admin, and
net cost of private
heaith insurance
Government public
heaith activities
88.4
51.0
13.5
23.9
52.7
26.8
257.3
199.7
23.2
34.4
133.6
56.3
276.0
216.7
23.7
35.6
145.4
58.7
292.5
231.3
24.5
36.7
155.1
62.8
310.4
247.0
25.4
38.0
168.3
67.1
406.1
332.9
29.2
44.0
220.3
88.1
605.7
515.7
36.6
53.4
297.7 •
124.4
investment
Research"^
Structures and
equipment
NHE per capita
Popuiation (millions)
GDP, biiiionsof doiiars
Reai NHE"
Chain-weighted GDP index
PHC deflator*
NHE as percent of GDP
59.3
16.4
42.9
$3,468.6
263.1
$6,657.4 ,
$1,032.4
0.88
0.81
13.7%
129.7
40.6
89.1
$6,648.8
296.8
$12,433.9
$1,746.2
1.13
1.20
15.9%
139.4
41.8
97.6
$7,025.9
299.7
$13,194.7
$1,806.3
1.17
1.25
16.0%
150.1
42.9
107.2
$7,439.1
301.9
$13,801.7
$1,877.6
1.20
1.28
16.3%
159.8
44.0
115.8
$7,867.7
304.3
$14,450.3
$1,962.7
1.22
1.33
16.6%
201.9
53.9
148.0
$9,861.9
314.1
$17,514.3
$2,311.8
1.34
1.52
17.7%
269.4
72.7
196.7
$13,101.1
326.5
$21,909.7
$2,835.0
1.51
1.834
19.5%
SOURCES: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group; and U.S.
Department of Commerce, Bureau of Economic Analysis and Bureau of the Census.
NOTES: Numbers might not add to totals because of rounding. 1993 marks the beginning of the shift to managed care.
I "Projected.
" Freestanding faciiities oniy. Additionai services are provided in hospitai-based faciiities and counted as hospital care.
' Research and development expenditures of drug companies and other manufacturers and providers of medicai equipment
and suppiies are excluded from "research expenditures* but are included in the expenditure class in which the product falis.
"Deflated using GDP chain-type price index (2000 = 100.0).
, 'Personal health care (PHC) chain-type index is constructed from the producer price index for hospital care, nursing home input
price index for nursing home care, and consumer price indices specific to each remaining PHC component (2000 = 100.0).
erate through the end of the projection period is expected to accelerate toward the end of the
from 6.6 percent in 2009 to 5.9 percent by 2017. projection period as the leading edge of the
Growth in public spending, on the other hand, baby-boom generation becomes eligible for
w l 4 6 26 February 2008

T R E N D S
EXHIBIT 2
National Health Expenditures (NHE), Average Annual Percentage Growth From Prior
Year Shown, Seiected Calendar Years 1993-2017
Spending category
NHE
Health services and supplies
Personai heaith care
Hospitai care
1993°
11.5
11.7
11.5
11.2
2005
6.6
6.6
6.5
5.5
2006
6.7
6.6
6.6
7.0
2007"
6.7
6.6
6.6
7.5
2008"
6.6
6.6
6.5
7.2
2012"
6.7
6.7
6.7
7.0
2017"
6.7
6.7
6.7
6.6
2006-2017"
6.7
6.7
6.7
6.9
Professionai services 12.0
Physician and clinical services 12.3
Other prof, services 16.4
Dentai services 9.7
Other PHC 11.8
6.9
6.4
7.2
6.9
11.1
6.1
5.9
4.9
5.7
9.5
6.2
5.7
4.8
5.9
11.8
6.0
6.1
5.5
5.7
6.3
6.4
6.1
5.4
5.6
10.1
6.4
5.7
5.5
5.9
11.0
6.3
5.9
5.4
5.8
10.3
Nursing home and home heaith 14.3 5.6 5.3 5.4 6.0 5.9' 6.1 6.0
Home health care= 22.1 6.8 9.9 9.2 7.8 7.5 7.5 7.7
Nursing home care" 12.9 5.2 3.5 3.8 5.2 5.2 5.4 5.2
Retali outiet saies of medical
products 9.7
Prescription drugs 10.2
Durabie medicai equipment 9.6
Nondurable medicai products 9.0
9.3
12.0
4.6
3.1
7.3
8.5
2.3
3.5
6.0
6.7
3.4
3.0
6.1
6.8
3.7
3.5
7.0
7.7
3.5
3.8
8.3
9.2
4.6
3.9
7.4
8.2
4.0
3.8
Program admin, and net cost of
private heaith insurance
Government pubiic heaith activities
Investment
Research"
Structures and equipment
NHE per capita
Popuiation (miiiions)
GDP, biiiionsof doiiars
Reai NHE°
Chain-weighted GDP index
Personal heaith care defiator'
13.7
13.7
9.2
9.7
9.1
10.4
1.0
8.4
6.0
5.2
7.3
8.1
6.4
6.7
7.8
6.3
5.6
1.0
5.3
4.5
2.1
3.3
8.8
4.3
7.4
2.9
9.5
5.9
1.0
6.1
3.4
3.2
3.4
6.6
7.0
7.7
2.7
9.8
5.9
0.7
4.6
3.9
2.6
3.2
8.5
6.9
6.5
2.6
8.1
5.8
0.8
4.7
4.5
2.0
3.4
7.0
7.1
6.0
5.2
6.3
5.8
0.8
4.9
4.2
2.4
3.4
6.2
7.1
5.9
6.2
5.9
5.8
0.8
4.6
4.2
2.4
3.8
6.7
7.1
6.2
5.2
6.6 ,
5.8
0.8
4.7
4.2
2.4
3.6
SOURCES: Centers for iVIedicare and Medicaid Services. Office ofthe Actuary, Nationai Heaith Statistics Group; and U.S.
Department of Commerce, Bureau of Economic Anaiysis and Bureau ofthe Census.
NOTES: Numbers might not add to totais because of rounding. 1993 mari<s the beginning of the shift to managed care. Growth
rates are caicuiated consistent with the Nationai Heaith Expenditure Accounts methodology. For example, the 2016 growth
rate above is equal to the levei of 2016 expenditures over the ievei of 2011 expertditures raised to the one-fifth power (the
average growth over five years); 2016 growth rate is shorthand for 2011-2016 growth rate.
'Average annuai growth from 1970 through 1993.
"Projected.
° Freestanding faciiities oniy. Additionai services are provided in hospital-based facilities and counted as hospital care.
" Research and deveiopment expenditures of drug companies and other manufacturers and providers of medical equipment
and suppiies are exciuded from "research expenditures' but are inciuded in the expenditure ciass in which the product falis.
• Defiated using gross domestic product (GDP) chain-type price index (2000 = 100.0).
'Personal heaith care (PHC) chain-type index is constructed from the producer price index for hospitai care, nursing home input
price index for nursing home care, and consumer price indices specific to each remaining PHC component (2000 = 100.0).
Medicare. From the sectoral perspective, pre- ate in 2007 because of higher Medicaid pay-scription
drug spending growth is projected ment rates and then to decelerate toward the
to decelerate in 2007, driven by slower price end of the projection period in a lagged re-growth,
but is expected to accelerate through sponse to projected lower growth in income.
2017 as utilization increases. On the other Medicare Part D is expected to have little
hand, hospital spending is expected to acceler- impact on overall health spending growth dur-
HEALTH AFFAIRS - Web Exclusive wl 4 7

H E A L T H T R A C K I N G
EXHIBIT 3
National Health Expenditures (NHE) As A Share Of Gross Domestic Product (GDP) And
Average Annual Growth In NHE Versus Growth In GDP, 2005-2017
NHE as percent of GDP NHE growth Average annua
20 - - - GDP growth
n NHE share of GDP
16
12
8
4
0
percen
—
tchange
10
8
6
/I
2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
, SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary. Nationai Heaith Statistics Group.
NOTES: The left axis (NHE share of GDP) reiates to the gray-shaded bars. The right axis (percent change in GDP and NHE) relates
I to the two iine graphs.
, ing the projection period. Per capita prescrip-
• tion drug spending growth is assumed to be
; identical for Medicare beneficiaries and for the
; population as a whole.' However, Medicare
' Part D enrollment growth is expected to in-
' crease at a faster rate than population growth;
' thus, aggregate Medicare drug spending is ex-
: pected to grow faster than overall drug spend-ing
over the projection period.
Because the Medicare projections are based
on current law, they are Kkely understated, as
they include the effect of negative physician
payment updates for the last ten years of the
projection. Consequently, we include a simula-
; tion of a spending scenario that imposes an-nual
Medicare physician payment updates of
0.0 percent. The simulation revealed a rela-
:tively small impact on total national health
; spending but a larger impact on Medicare
'spending.
Model And Assumptions
These projections are generated within a
"current-law" framework that incorporates
actuarial, econometric, and judgmental Inputs.
The econometric models used to project pri-vate
spending are reviewed annually."* The
Medicare projections are primarily based on
the 2007 Medicare Trustees report, and the
Medicaid spending projections are consistent
wdth that report's assumptions.' The projec-tions
for both private and pubUc spending use
the economic and demographic assumptions
from the 2007 Medicare Trustees report, up-dated
to reflect the latest historical data.* The
prescription drug projection reflects the latest
Medicare Part D cost estimates and the as-sumptions
that appear in the president's fiscal
year 2009 budget.^
Projections are inherently subject to uncer-tainty
Models are estimated based on histori-cal
trends and relationships in health spend-ing;
any structural break in these relationships
is generally unpredictable. These projections
also rely on assumptions about macroeco-nomic
conditions and health-sector parame-ters
and their relationship to health care
spending, with the degree of uncertainty in-creasing
along with the projection horizon.
Therefore, we qualify our projections subject
to these uncertainties and how they might af-fect
our results.
In eight of the past nine years, these projec-tions
have correctly predicted the direction of
growth in the first year of the period. On aver-age
over that time, they have shghtly overesti-mated
first-year growth by 0.2 percentage
point. A more comprehensive accuracy analy-
26 February 2008

T R E N D S
sis is on the Web site of the Centers for Medi-care
and Medicaid Services (CMS).^
Factors Contributing To Growth
The primary drivers of personal health care
spending growth during the projection period
are medical prices and utihzation, followed by
smaller impacts from population growth and
the age-sex mix (Exhibit 4). Medical prices
are projected to decelerate from 3.4 percent in
2006 to 3.2 percent in 2007, led by much
slower growth in prescription drug prices
(from 3.5 percent in 2006 to an expected 1.4
percent in 2007). In 2008 and beyond, medical
price growth is anticipated to rebound. Eor
the 2012-2017 period, price growth is ex-pected
to account for 3.8 percentage points of
the 6.7 percent growth (57 percent) in per-sonal
health care spending, versus 3.2 of the 6.6
percent growth (49 percent) in 2007
Since 1995, widespread selective contract-ing
associated with the expansion of managed
care has mitigated growth in medical price in-flation.'
During that time, this output price in-flation
has averaged slower growth than the
CMS index of medical input prices. The
slower growth in medical price inflation rela-tive
to growth in input costs also reflects de-clines
in real physician incomes relative to
those of other professional and technical occu-pations.'"
Eor the projection period, the impact
of selective contracting is assumed to be less
than in the managed care era, and growth in
physician incomes is assumed to gradually
converge with income growth for other profes-sional
and technical occupations. As a result,
medical price inflation is expected to steadily
rise relative to input price inflation, growing
0.6 percentage point faster by 2017"
Udlization, which includes both the vol-ume
and intensity of services, is primarily in-fluenced
by trends in real household income
and, to a lesser extent, the substitution effect
associated with relative medical price inflation
and shifts in insurance coverage. The impact of
growth in real per capita disposable personal
income reflects not only the effect on use of
medical care by individual households, but
also changes in the nature and extent of insur-ance
coverage and the impact on provider in-centives
associated with methods of payment.
These effects occur with a lag, reflecting the
multiple intermediaries between the con-sumer
of health care and the bill payer. Rising
disposable income growth (on average) from
2002 to 2007 continues to suggest a mild accel-
EXHIBIT4
Factors Accounting For Growth In Personal Health Care Spending, Selected Calendar
Years 1993-2017
Average annual percent change ~
7.5
6.0
4.5
Age-sex mix
Population
3.0
1.5
0.0
• - • • Utilization
D Medical prices
1993-2003 2003-05 2005-06 2006-07 2007-08 2008-12 2012-17
SOURCE: Centers for Medicare and Medicaid Services. Office of the Actuary.
NOTES: Utilization includes quality and mix of services. As a residual, this factor also includes any errors in measuring prices or
totai spending. Medicai prices refiect a chain-weighted index of the price for all personal health care deflators. Growth rates are
calculated consistent with the National Health Expenditure Accounts methodology.
H E A L T H AFFAIRS - Web Exclusive w l 4 9

eration in utilization through 2007. However,
the expectation of slower disposable income
growth from 2008 to 2017 is the primary driver
for the slowing growth in udlizadon toward
the end of the projection period.'^
The impact of the population aging is ex-
; pected to account for a relatively small share of
' future health care spending growth on a per
enrollee basis but to have a substantial influ-
: ence on the public share of spending growth,
as the leading edge of the baby-boom genera-tion
becomes eligible for Medicare." The effect
of the changing age-mix of the population is
expected to account for 0.4 percentage point
of growth in 2007 and 0.6 percentage point in
', 2017. The effect of population growth on
' spending growth is expected to be constant
' throughout the projection period, adding 0.8
' percentage point annually. By comparison,
I Medicare enrollment growth alone is pro-jected
to contribute 2.9 percentage points to
growth in Medicare spending by 2017
Total spending growth expected over the
: entire period is slightly slower than last year's,
driven primarily by reestimation of the model
' for real per capita spending; lower historical
' data for spending, prices, and input costs; and
lower projections of medical price inflation.
Contributing to the lower price growth is
monthly employer payroll data from the Cur-rent
Employment Survey, which show a sharp
deceleration in average hourly earnings for the
health sector in 2007, particularly for non-supervisory
hospital employees." Also, the
prices for one key physician input cost, mal-
, practice insurance premiums, are projected to
; grow more slowly than in the recent past and
; contribute to reduced medical price inflation.'^
Funding Outlook, By Payer
• Medicare. In 2007, Medicare spending
: growth is projected to slow to 6.5 percent, fol-lowing
18.7 percent growth in 2006 associated
: with the introduction of Medicare Part D (Ex-hibit
5). This expected deceleration is also in-fluenced
by a smaller increase in Medicare Ad-vantage
(MA) plan payments as a result of risk
adjustments and is expected to produce
slower growth across most sectors, including
physicians and prescription drugs.'* After
2007, Medicare spending growth is antici-pated
to rebound, then accelerate to a greater
degree in the last half of the projection period,
driven by higher growth in Medicare enroll-ment.
Medicare spending is expected to ac-count
for just over one-fifth (20.7 percent) of
national health spending by 2017
Medicare enrollment is projected to con-tinue
to shift from fee-for-service (FFS) to-ward
managed care over the next decade. By
2017, 275 percent of eligible Medicare benefi-ciaries
are expected to enroll in an MA plan,
compared to 16.4 percent in 2006. This ex-pected
shift is driven in part by the increased
availability of new plans and added benefits in
MA plans, such as lower cost sharing.
The Medicare spending growth pattern for
physician services reflects the physician pay-ment
updates required in current law under
the Sustainable Growth Rate (SGR) system.
The SGR system mandates the adjustment of
future physician payment updates for any dif-ferences
between past target and actual
spending levels.''' Since 2003, scheduled nega-tive
updates have been avoided through legis-lative
changes; however, the resulting higher
actual physician spending has not been ac-companied
by a higher physician spending tar-get,
which leads to projected physician pay-ment
cuts over the projection period. Since
these projections assume no legislative
changes to the physician payment system, the
physician projections are likely understated.
Given the high probability of legislative in-tervention
to prevent the SGR-mandated phy-sician
payment cuts, the effects of alternative
payment update scenarios were explored in a
supplemental memo to the 2007 Medicare
Trustees report.'^ Based on this analysis, the
potential impact of a 0.0 percent update sce-natio
on the NHE projections was examined."
Such an update for 2008-2017 would yield to-tal
Medicare spending that is 6.4 percent
higher and Medicare physician spending that
is 25.3 percent higher in 2017 than anticipated
under current-law assumptions (Exhibit 6).
The projected effect on aggregate health
spending measures, however, would be
wl50 26 February 2008

T R E N D S
EXHIBIT 5
National Health Expenditures (NHE), By Source Of Funds.'Amounts, And Average
Annual Growth From Prior Year Shown, Selected Caiendar Years 1993-2017
Source of funds
NHE (billions)
Private funds
Consumer payments
Outof-pocket payments
Private health insurance
Other private funds
Public funds
1993
$912.6
512.5
440.7
145.2
295.5
71.8
400.1
2005
$1,973.4
1,076.6
932.7
247.1
685.6
143.9
896.8
2006
$2,105.4
1.135.2
980.0
256.5
723.4
155.3
970.3
2007'
$2,245.3
1.206.8
1,038.7
269.3
769.4
168.1
1.038.5
2008°
$2,394.1
1,285.0
1,104.2
282.6
821.7
180.8
1,109.1
2012'
$3,097.8
1,643.2
1,408.6
350.6
1.058.0
234.6
1.454.6
2017'
$4,277.0
2,197.9
1,879.6
464.3
1.415.3
318.3
2.079.1
Federal
Medicare
Medicaid''
Other federai'^
State and iocai
Medicaid"
Other state and locai'=
Total Medicaid"
279.2
150.0
76.8
52.5
120.9
45.6
75.2
122.4
639.2
338.0
179.1
122.0
257.7
134.4
123.3
313.5
704.9
401.3
175.7
127.9
265.4
134.9
130.5
310.6
753.0
427.3
' 190.7
135.0
285.5
147.5
138.0
338.2
806.7
460.7
203.7
142.3
302.4
157.6
144.9
361.2
1.065.3
610.5
273.4
181.4
389.3
212.6
176.7
486.0
1.536.2
884.0
402.3
249.9
543.0
315.0
227.9
717.3
Average annual growth
NHE
Private funds
Consumer payments
OutK)f-pocket payments
Private heaith insurance
Other private funds
Pubiic funds
1993°
11.5%
11.0
10.9
8.0
13.7
11.1
12.2
2005
6.6%
6.4
6.4
4.5
7.3
6.0
7.0
2006
6.7%
5.4
5.1
3.8
5.5
7.9
8.2
2007°
6.6%
6.3
6.0
5.0
6.4
8.3
7.0
2008°
6.6%
6.5
6.3
4.9
6.8
7.5
6.8
2012°
6.7%
6.3
6.3
5.5
6.5
6.7
7.0
2017°
6.7%
6.0
5.9
5.8
6.0
6.3
7.4
2006-
2017°
6.7%
6.2
6.1
5.5
6.3
6.7
7.2
Federal
Medicare
Medicaid"
Other federai"^
State and iocai
Medicaid"
Other state and iocai'^
Totai Medicaid"
12.7
13.8
15.4
9.0
11.3
13.6
10.3
14.6
7.1
7.0
7.3
7.3
6.5
9.4
4.2
8.2
10.3
18.7
-1.9
4.9
3.0
0.4
5.8
-0.9
6.8
6.5
8.5
5.5
7.6
9.3
5.8
8.9
7.1
7.8
6.8
5.4
5.9
6.8
5.0
6.8
7.2
7.3
7.6
6.3
6.5
7.8
5.1
7.7
7.6
7.7
8.0
6.6
6.9
8.2
5.2
8.1
7.3
7.4
7.8
6.3
6.7,
8.0
5.2
7.9
SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary, Nationai Heaith Statistics Group.
NOTES: Numbers might not add to totais because of rounding. 1993 marks the beginning of the shift to managed care. Growth
rates are calculated consistent with the Nationai Heaith Expenditure Accounts methodology. For example, the 2017 growth
rate above is equal to the levei of 2017 expenditures over the level of 2012 expenditures raised to the one-fifth power (the
average growth over five years); 2017 growth rate is shorthand for 2012-2017 growth rate.
' Projected.
'Includes Medicaid and State Chiidren's Health Insurance Program (SCHIP) expansion (Titie XiX).
'inciudes Medicaid SCHIP expansion (Title XXI).
"Subset of pubiic funds; inciudes both the federai portion and the state and iocai portions of Medicaid.
"Average annuai grovrth from 1970 through 1993.
smaller. In 2017, total national health spending
would be 0.7 percent higher than under cur-rent
law, and the health share of GDP would
increase by 0.2 percentage point.
• Medicaid. Medicaid spending is pro-jected
to increase 8.9 percent in 2007, the high-est
single-year growth rate since 2003 (9.1 per-cent),
driven by growth in hospital (11.4
percent), home health care (13.7 percent), and
other personal care services (including home
and community-based services; 14.4 percent).
According to a survey of state Medicaid offi-
HEALTH AFFAIRS - Web Exclusi w l 5 1

H E A L T H T R A C K I N G
; EXHIBIT 6
' Projected National Health Expenditures (NHE) Under Current Law And 0 Percent
IVIedicare Physician Payment Update Scenario, Selected Years 2007-2017
Spending category and scenario
Total NHE, 0% update scenario
Total NHE, current law
Percent difference
Total physician, 0% update scenario
Total physician, current law
Percent difference
Totai Medicare, 0% update scenario
Totai iVIedicare, current law
Percent difference
Medicare physician, 0% update scenario
Medicare physician, current iaw
Percent difference
2007
$2,245.6
$2,245.6
0.0%
$473.0
$473.0
0.0%
$427.3
$427.3
0.0%
$98.0
$98.0
0.0%
2008
$2,397.4
$2,394.3
0.1%
$504.4
$501.7
0.5%
$465.3
$460.7
1.0%
$106.8
$102.5
4.2%
2009
$2,560.0
$2,555.1
0.2%
$536.9
$532.8
0.8%
$502.7
$495.0
1.6%
$114.9
$108.2
6.2%
2011
$2,915.9
$2,905.1
0.4%
$609.7
$601.0
1.4%
$586.4
$568.5
3.2%
$133.1
$118.9
11.9%
2013
$3,321.7
$3,305.0
0.5%
$688.8
$675.1
2.0%
$685.6
$656.4
4.5%
$154.6
$132.2
17.0%
2015
$3,780.5
$3,757.0
0.6%
$773.0
$753.6
2.6%
$800.6
$758.8
5.5%
$178.9
$147.4
21.4%
2017
$4,308.7
$4,277.1
0.7%
$866.2
$840.0
3.1%
$940.2
$884.0
6.4%
$207.8
$165.8
25.3%
' SOURCE: Centers for Medicare and Medicaid Services. Office of the Actuary.
; NOTE: The Medicare current-law expenditure projections refiect the direct impact of the substantial reductions in physician
• payment rates that wouid be required under the current-law Sustainabie Growth Rate (SGR) provisions. Secondary SGR
I impacts on Parts A, B, and D are not reflected; accordingly, these projections do not represent our best estimate of the actual
, Medicare expenditures that wouid resuit under current law. Such secondary Impacts couid inciude (1) substantiaily reduced
, beneficiary access to physician services, (2) a significant shift in enroiiment to Medicare Advantage pians, (3) an Increase in
' emergency room services, (4) an increase in mortaiity rates, and/or (5) an increase in hospitai services. We have exciuded
' secondary impacts because of their speculative nature, the minimal likelihood that the physician payment reductions wiii occur
in practice, and to retain the usefuiness ofthe current-iaw baseline for hospitai and other nonphysician expenditure
categories.
cials, states were expected, as a result of im-proved
fiscal conditions, to increase provider
payment rates more so than in recent years and
jto have fewer provider rate freezes or cuts.-^"
Following the Part D-related decrease in pre-
'scription drug spending in 2006, an expected
acceleration to 8.0 percent growth in 2007 is
expected to be another key contributor to the
overall increase in Medicaid spending.
Medicaid spending is expected to grow at
an average rate of 7.9 percent per year for the
projection period and to increase as a share of
national health spending from 14.8 percent in
'2006 to 16.8 percent in 2017 Home health care
and other personal care are expected to be the
fastest-growing services, reflecting Medicaid's
role as a major payer in long-term care and the
'continued interest in using home and commu-nity-
based as opposed to institutional care.
• Private health Insurance. In 2006, pri-yate
health insurance premiums per enrollee
grew just 5.2 percent, largely because of the in-troduction
of Medicare Part D. For 2007, these
premiums are expected to grow 6.0 percent.
Growth in underlying medical benefits is ex-pected
to remain steady at approximately 6.2
percent in 2007 and 2008, close to the growth
experienced in 2005 and 2006.^' In 2007, the
net cost of private health insurance (the differ-en!
ce between premiums and benefits) is ex-pected
to grow below the rate of growth in
benefits, a trend evident since 2004. This
trend has helped slow growth in premiums. As
a result, the net cost ratio (net cost of private
health insurance divided by total premiums)
dedined from 13.5 percent in 2003 to 12.3 per-cent
in 2006 and is projected to decline further
in 2007 to 12.1 percent.
A nuld cycle in premium growth is ex-pected
over the projection period, with accel-eration
to 6.9 percent in 2009 followed by a
gradual slowdown to 5.9 percent by 2017.^-^
This trend is partially driven by the expected
pattern of growth in medical benefits. How-ever,
premiums are also expected to be affected
by cyclical fluctuations in insurers' profit mar-gins
and administrative costs (captured in the
net cost ratio), commonly known as the un-
26 February 2008

T R E N D S
derwriting cycle.^' A milder underwriting cy-cle
is expected as better information systems
dampen the variation caused by sequential un-der-
and overprediction of medical trends.
D Out-of-pocket spending. The growth in
out-of-pocket payments is projected to con-tinue
to remain below that of the growth in
both aggregate national health spending and
private health insurance spending in 2007 (Ex-hibit
5). Over the remainder of the period and
in response to projected slowing economic
growth, employers could shift more costs to
employees through benefit buy-downs and in-creased
cost sharing, resulting in a conver-gence
of the growth rates for out-of-pocket
and private insurance spending.^'' The impact
of consumer-directed health plans on out-of-pocket
spending has been, and is expected to
remain, minor.
fVOedical Services Spending
Outlook, By Sector
D Prescription drugs. Aggregate pre-scription
drug spending growth is expected to
be 6.7 percent in 2007 a slowdown of 1.8 per-centage
points (Exhibit 2). This deceleration
is directly related to drug price growth, which
is expected to decelerate 2.1 percentage points
to 1.4 percent. The comparatively low price
growth can be attributed mainly to factors re-lating
to generic drugs: (1) generic equivalents
of many top-selling drugs have become avail-able;
(2) the prices of the generic forms of
Zocor and Zoloft fell sharply at the beginning
of 2007, when their six-month exclusivity pe-riods
ended; and (3) price competition for
generics in retail outlets has intensified.-^^ Pre-scription
drug use is expected to accelerate
slightly in 2007 partially due to the effect of
Medicare beneficiaries' having Part D coverage
for all of 2007 (some only had coverage for as
few as eight months in 2006).
Drug spending growth is expected to re-main
about the same in 2008 as in 2007, al-though
its composition is expected to change.
Price growth is projected to rebound some-what
from its 2007 rate, while use is projected
to decelerate slightly. From 2008 to 2017, price
growth is expected to average 3.7 percent.
with a gradual acceleration in utilization
growth. Lower treatment guidelines are likely
to underlie higher use in some specific thera-peutic
classes (such as cholesterol and high
blood pressure).2* Also, expanding indications
could increase utilization growth, especially
among specialty drugs that are priced much
higher than nonspecialty drugs.-^' Contribu-tions
to higher spending growth resulting
from recent increases in utilization have been
moderated by corresponding growth in the ge-neric
dispensing rate. Since growth in generic
use is expected to level off during the projec-tion
period, the impact of rising utilization
rates could become increasingly more influen-tial
on total spending growth. Finally, despite
the recent difficulties facing drug manufactur-ers
on new drug approvals, the number of new
drugs coming onto the market is expected to
mildly accelerate over the projection period,
partially offsetting spending declines for drugs
that lose patent protection.
D Hospitals. Overall hospital spending
growth is expected to be 7.5 percent in 2007,
an increase of 0.4 percentage point (Exhibit 2).
Higher reimbursement rates are expected to
cause Medicaid spending for hospital care to
accelerate sharply to 11.4 percent in 2007.-^^
Medicare spending growth, on the other hand,
is projected to remain at 5.1 percent in 2007, a
result of continued projected slower inpatient
use and the risk adjustments to MA rates.
Growth in hospital spending by private payers
is expected to decelerate in 2007 partially as a
result of slowing hospital price growth.
Total hospital spending growth is then pro-jected
to gradually slow from 72 percent in
2008 and eventually fall to 6.4 percent by 2017,
as the expected slowdown in private spending
growth outpaces faster public spending
growth. Private hospital spending growth is
expected to remain relatively stable through
2011 and then decelerate over the remainder of
the projection period, to 5.6 percent in 2017
Medicare spending growth, conversely, is ex-pected
to accelerate from 71 percent in 2011 to
8.0 percent by 2017 The slowdown in private
spending growth and the acceleration in
Medicare spending growth coincide with the
HEALTH AFFAIRS - Web Exclusi^ w l 5 3

period in which the leading edge of the baby-boom
generation will become eligible for Medi-care.
In 2008 and beyond, Medicaid spending
growth rates for hospital care are expected to
increase 6.5 percent per year, on average.
• Physician services. Spending for physi-cian
and clinical services is expected to con-tinue
its recent decelerating trend and slow
0.2 percentage point to 5.7 percent in 2007
(Exhibit 2). For the entire projection period,
physician spending growth is anticipated to
average 5.9 percent per year, compared to the
6.6 percent average armual growth rate during
1995-2006. In the 0.0 percent Medicare physi-cian
payment update scenario, average annual
growth for the period projects to 6.2 percent.
Several developments are anticipated to have
competing effects on the pattern of growth in
physician spending. For instance, projected
shortages of primary care physicians and the
continued mergers of practices are expected to
apply upward pressures, while possible
changes to benefit structure in the form of
higher cost-sharing requirements are antici-pated
to mitigate spending grov^h.^'
' Medicaid as a share of physician spending
is expected to increase slightly over the projec-tion
period from 71 percent in 2006 to 79 per-cent
by 2017. Conversely, under current law.
Medicare's share of physician spending is an-ticipated
to decrease from 20.6 percent in 2006
tp 19.7 percent in 2017 However, using the 0.0
percent Medicare physician payment update
scenario, the share of physician spending paid
by Medicare would be expected to increase to
24.0 percent by 2017
• Long-term care. Home health care
spending is projected to grow 9.2 percent in
2007, a slowdown of 0.7 percentage point (Ex-hibit
2). Despite this expectation of slowing
g|rowth, home health is sdll projected to be
among the fastest-growing health care sectors
in 2007 and over the projection period, with
anticipated average growth of 11 percent per
year. Medicare and Medicaid are expected to
drive this rapid expansion as the public share
of home health care is expected to increase
from 75 percent in 2006 to 84 percent in 2017
Nursing home spending growth is pro-jected
to increase 0.4 percentage point in 2007
to 3.8 percent and then to accelerate to an av-erage
annual growth rate of 5.3 percent
through 2017. Medicaid is expected to remain
the largest payer, paying for about 43 percent
of all such care during the projection period.
The impact of the baby-boom generation on
nursing home spending is likely to be small,
even at the end of the projection period, since
nursing home use is highest for people age
eighty-five and older and the oldest baby
boomers v^dU be just seventy-one in 2017'°
Concluding Comments
With the implementation of Medicare Part
D behind us, a focal point of the next ten years
will be the impending movement of the baby
boomers into Medicare. Expected trends later
in the projection period, such as accelerating
growth in Medicare enrollment, are a first sign
of this shift. Although the difference in rates
between health spending growth and overall
economic growth is projected to be lower over
the next decade than the previous thirty years,
on average, cost pressures continue to mount.
As a result, health is projected to consume an
expanding share of the economy, which means
that pohcymakers, insurers, and the public
wall face increasingly difficult decisions about
the way health care is dehvered and paid for.
The authors thank the other members ofthe National
Health Expenditure Accounts Projections Team:
Jonathan Cylus and Kevin Lyons. The opinions
expressed here are the authors' and not necessarily
those ofthe Centers for Medicare and Medicaid
Services. The authors also thank Richard Foster,
Stephen Heffler, Aaron Catlin, Cathy Curtis, Mark
Freeland, and Micah Hartman.
NOTES
1. J. Poisal et al., "Health Spending Projections
Through 2016: Modest Changes Obscure Part D's
Impact," Health Affairs 26, no. 2 (2007); w242-
w253 (published online 21 February 2007;
iO.B77/hltha£f.26.2.w242).
2. A. Catlin et al., "National Health Spending in
2006; A Year of Change for Prescription Drugs,"
Health Affairs 27, no. 1 (2008); 14-29.
3. Boards of Trustees, 2007 Annual Report ofthe Boards
wl54 26 February 2008

T R E N D S
of Trustees ofthe Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, 23 April
2007, http;//www.cms.hhs.gov/ReportsTrusr
Funds/downloads/tr2007pdf (accessed 23 Janu-ary
2008).
4. For a description of the projections model, see
CMS, "Projections of National Health Expendi-tures;
Methodology and Model Spedficadon," 21
February 2007, http;//www.cms.hhs.gov/
NationalHealthExpendData/downloads/
projections-methodology.pdf (accessed 23 Janu-ary
2008).
5. Boards of Trustees, 2007 Annual Report
6. Available historical data (as of December 2007)
and updated near-term forecasts are used to
transition to the 2007 Medicare Trustees report
assumptions.
7. OMB, "Budget of the United States Government,
Fiscal Year 2009," http;//wwvwvhitehouse.gov/
omb/budget (accessed 23 January 2008).
8. CMS, "Projection Accuracy of National Health
Expenditures," http;//www.cms.hhs.gov/
NationalHealthExpendData/03_NationalHealth
AccountsProjected.aspi^^TopOfPage (accessed 23
January 2008).
9. S. EoUand, A. Goodman, and M. Stano, The Eco-nomics
of Health andHealth Care, 5th ed. (Upper Sad-dle
River, NJ.; Pearson Education, 2007), 244.
10. Real physician income measures are largely ex-cluded
from our input price measures. See H.T.
Tu and P. Ginsburg, "Losing Ground; Physician
Income, 1995-2003" (Washington; Center for
Studying Health System Change, June 2006).
11. This compares to an output price to input price
differential of 1.6 percentage points from 1980
through 1995 and -0.3 percentage point from
1995 through 2006.
12. Growth in real disposable personal income rose
from 2.5 percent in 2002 to 3.2 percent in 2007
Growth is expected to slow fot the rest of the
projection period, ending at 2.3 percent by 2017
which is 0.5 percentage point below its average
over the past thirty years.
13. M. Hartman ec al., "U.S. Health Spending by Age,
Selected Years through 2004," Health Ajfairs 27, no.
1 (2008); wl-wl2 (published online 6 November
2007; 10.1377/hIthaff.271.wl).
14. BLS, "B-16. Average Hours and Earnings of Pro-duction
and Nonsupervisory Workers on Private
Nonfarm Payrolls by Detailed Industry," ftp;//ftp
.bls.gov/pub/suppl/EMPSITCESEEB16.TXT (ac-cessed
19 February 2008).
15. Global Insight Inc., ''3rd Qtr 2007;
@USMACRO/CONTROL0807@CISSIM/TL08
07SIM" (Contract no. GS-1OF-O318K, HSM-500-
2006-00037G, prepared for the CMS, 2007).
16. This is a one-year adjustment that is not ex-pected
to affect future MA enrollment trends.
17 M.K. Clemens, "Estimated Sustainable Growth
Rate and Conversion Factor, for Medicare Pay-ments
to Physicians in 2007," November 2006,
http;//www.cms.hhs.gov/SustainableG Rates
ConEact/Dovraloads/sgr2007f.pdf (accessed 23
January 2008).
18. M.K. Clemens, "Projected Medicare Part B Ex-penditures
under Two Illustrative Scenarios
with Alternative Physician Payment Updates,"
April 2007, http;//www.cms.hhs.gov/Reports
TrustFunds/downloads/AlternativePhysician
Update.pdf (accessed 23 January 2008).
19. See note in Exhibit 6.
20. V. Smith et al., "As Tough Times Wane, States Act
to Improve Medicaid Coverage and Quality; Re-sults
from a Fifty-State Medicaid Budget Survey
for State Fiscal Years 2007 and 2008," October
2007 http;//www.kff.org/medicaid/7699.cfm (ac-cessed
23 January 2008).
21. See Mercer, "U.S. Employers' Health Benefit
Costs Continues to Rise at Twice the Inflation
Rate," Press Release, 19 November 2007 http;//
www.mercer.com/press release/detaOs.jhtml/
dynamic/idContent/1287790 (accessed 23 Janu-ary
2008); and Henry J. Kaiser Family Founda-tion/
Health Research and Educational Trust, Em-ployer
Health Benefits: 2007 Annual Survey, September
2007, http;//www.kff.org/insurance/7672/index
.cfm (accessed 23 January 2008).
22. Ibid.
23. A. Rosenblatt, "The Underwriting Cycle; The
Rule of Six," Health Affairs 23, no. 6 (2004); 103-
106.
24. P. Fronsdn, "The Future of Employment-Based
Health Benefits; Have Employers Reached a Tip-ping
Point?" EBRI Issue Brief no. 312 (Washing-ton;
EBRI, December 2007).
25. S. Rubenstein, "Why Generic Doesn't Always
Mean Cheap," Wall Street journal 13 March 2007;
and S. Saul, "Helped by Generics, Inflation of
Drug Costs Slows," New York Times, 21 September
2007
26. Medco Health Solutions, 2007 Drug Trend Report
(Franklin Lakes, NJ.; Medco, 2007), 38-40.
27 CVS Caremark, Trends Rx Report 2007
(Woonsocket, R.I.; CVS, 2007), 27-30.
28. Smith et al., "As Tough Tmies Wane."
29. H. Pham and P. Ginsbuig, "Unhealthy Trends;
The Future of Physician Services," Health Affairs
26, no. 4 (2007); 1586-1598.
30. Hartman et al., "U.S. Health Spending by Age."
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