Medical Device Daily Washington Editor

The recent report on projected healthcare spending by the Centers for Medicare & Medicaid Services (CMS) comes as no surprise, but it does serve as yet another clump of snow in the avalanche of bad news about the future of healthcare spending in the U.S. However, like all other such documents, nowhere does it make the case that simply spending less is an option.

The actuaries at CMS did note that rising disposable incomes are one of the primary drivers in healthcare inflation, but how and when healthcare inflation might crimp the wallet enough to blunt the American appetite for the latest and greatest is still the subject of speculation.

According to CMS, healthcare inflation for the nation as a whole in 2007 was 6.7%, and CMS anticipates that “average annual growth is expected to remain near that rate through 2017,” the last year of the forecast.

Further clouding the picture is the fact that various forecasts have pegged either 2018 or 2019 as the date by which the trust fund for Medicare Part A is scheduled to run dry.

The growth in public-sector spending in 2006 of 8.2% was attributed largely to Medicare’s Part D drug benefit, but CMS expects the jump of 6.8% calculated for 2007 for Medicare to be a low-water mark for the next decade “as the leading edge of the baby boom generation begins to enroll in Medicare.”

Private spending also is growing, albeit at a slower pace. The CMS statement notes that private payers and individuals will have paid out 6.3% more in 2007 than in the previous year, and that growth in this area will peak at 6.6% in 2009. This will be followed by a decline “in response to projected slower economic growth in the latter years” of the forecast.

Acting CMS director Kerry Weems said in the statement that the report “reminds us that we need to accelerate our efforts to improve our healthcare delivery system.”

Several members of the CMS actuarial team published an article in the current edition of Health Affairs, noting that the estimated spending figure of $2.2 trillion for 2007 will have almost doubled to $4.3 trillion by 2017, and because average GDP growth during that time is liable to be about 4.9%, healthcare spending will maintain an inflationary lead of 1.9% per annum on average. In that scenario, the share of GDP consumed by healthcare would rise from 16.3% in 2007 to 19.3% in 2017.

The authors, led by CMS economist Sean Keehan, conclude that the “primary drivers of personal healthcare spending growth ... are medical prices and utilization.” The authors said that while medical price inflation slowed from 3.4% in 2006 to 3.2% last year, that trend will turn about and run toward 3.8% between 2008 and 2017.

The authors see discretionary income as some of the rocket fuel behind healthcare inflation. The article says utilization “is primarily influenced by trends in real household income” and that growth in disposable income was behind much of the inflation seen between 2002 and 2007. An expected slower growth rate in disposable incomes over the next nine years “is the primary driver for the slowing growth in utilization toward the end of the projection period.”

The Health Affairs article also notes that a smaller increase federal funding for Medicare Advantage is part of the expected slow growth rate in Medicare spending in 2007 compared to 2006, but that enrollment in Part D will likely rise from 16.4% of beneficiaries in 2006 to more than 27% in 2017.

One possible sticking point looms yet. The article points out that CMS’s projections assume that the Part B physician fee schedule will continue to be blunted by the sustainable growth rate (SGR) mechanism now in play. While Congress is at odds over whether to scrap SGR – and the Medicare Payment Advisory Commission has yet to propose an alternative – the HA article states that “the high probability of legislative intervention” hints that “the physician projections are likely to be understated.”

CMS acknowledged that the agency’s projections are not always deadly accurate. In an associated report dealing with the accuracy of the current and past analyses, CMS said a number of factors internal and external to projections can pull the actual numbers away from estimates. As noted previously, disposable income can tweak the numbers, but legislative changes can also drive cost curves in ways that are difficult or impossible to anticipate.

Estimates of the share of gross domestic product expended on healthcare are said to have ranged .3% in both the first and second years of those projections. However, CMS says that while its forecasts for sub-sectors of healthcare have ranged as high as 0.8% in either direction, the overall spending forecasts have been fairly reliable. CMS’s past estimates of national health expenditures have “on average, overestimated actual spending growth by 0.2 percentage points in the first projected year, but averaged 0.0 percentage points difference in the second,” the report says.