CBO Still Unsure Whether Recent Health Care Slowdown Means Lower Long-Term Growth

Update: The second graph has been corrected to show the correct year for each line.

It is no secret that the growth of federal health care spending is key to the government’s long-term fiscal outlook. With evidence growing that at least some portion of the recent slowdown in health care cost growth represents structural changes in the health care system, the Congressional Budget Office (CBO) revised downward their estimates of health care spending over the coming years from their last Long-Term Budget Outlook in 2012. Despite improved projections in the near term, however, CBO’s projected long-term growth rates remain nearly unchanged and still far in excess of per capita economic growth. Moreover, the short-term gains actually erode over time due to increased projections of longevity.

In fact, while spending on Medicare is now estimated to be 4 percent lower over the next decade than it was last year, CBO actually increased its projections of program growth after 2023 (from an average annual rate of 6.4% from 2023-2050 to 6.5%). Even within a decade, though excess cost growth (the per beneficiary growth above economic growth per capita) for Medicare is expected to average only 0.3 percent (in part due to the effects of the 24 percent physician payment cut dictated by the Sustainable Growth Rate formula), it is expected to rise back to 1.4 percent by 2023, which has been a more typical level in the past.

Part of the explanation is that CBO now expects higher per beneficiary spending growth in the 2020s and only slightly lower growth thereafter. Looking at the causes of the recent slowdown, CBO explains that “even the portion of the recent slowdown that reflects structural changes in payment mechanisms or in how care is delivered may represent [a] one-time downward shift in costs rather than a persistent reduction in the growth rate.”

On a more positive note, CBO now also predicts that Americans will live longer than previously anticipated. While increased longevity would be great news, it also means higher spending on programs to support older Americans, particularly Medicare and Social Security.

Therefore, as you can see in the graph below, Medicare spending in CBO’s latest projections actually slowly catches up to last year’s estimates, surpassing them in 2054. This also happens when looking at all major federal health care programs, although the catch up would not be complete until 2076.

Importantly, even if the recent health care slowdown did continue in full, a significant portion of the growth in federal health care programs over the next couple of decades is driven by demographics rather than health costs. In fact, the retirement of the baby-boom population and growing life expectancy are projected to account for 35 percent of the growth of major health care programs by 2038, with the remainder attributed to excess health care cost growth (40 percent) and the Affordable Care Act’s coverage expansions (26 percent).

CBO’s updated projections are an important reminder that controlling health care cost growth over the long-term remains arguably the most critical challenge facing the federal budget. While the recent slowdown is encouraging, more almost certainly must be done. To change the spending trajectory over the long-term, reforms will likely need to be made to the way we deliver and pay for care. Fortunately, as a recent paper from the Moment of Truth Project shows, a consensus appears to be building on the types of reforms that can help bend the health care cost curve while also improving the patient experience.