National Health Expenditure Projections, 2016–25 Briefing Sean P. Keehan, Devin A. Stone, Gigi A. Cuckler, Andrea M. Sisko, Andrew J. Madison, Sheila D. Smith, Christian J. Wolfe, Joseph M. Lizonitz, and John A. Poisal Office of the Actuary Centers for Medicare and Medicaid Services February 15, 2017

Major Findings National Health Expenditure Projections, 2016–25 Under current law, health spending is projected to grow at an average rate of 5.6 percent per year (4.7 percent per capita) for 2016-2025 driven by: Economic growth Medical prices Population aging Health spending is projected to grow 1.2 percentage points faster than Gross Domestic Product (GDP) per year over this period. Health share of GDP is expected to rise from 17.8 percent in 2015 to 19.9 percent by 2025. Federal, state and local governments are projected to sponsor 47 percent of national health spending by 2025 (from 46 percent in 2015). The insured share of the population is projected to increase from 90.9 percent in 2015 to 91.5 percent in 2025.

NHE Projections Methods The NHE Projections for 2016-25 were developed using actuarial and econometric modeling techniques, and include estimates by type of service/good, payer, and sponsor. Projections are consistent with the 2016 Medicare Trustees Report. These projections are constructed using a current-law framework and thus do not assume potential legislative changes over the projection period, nor do they attempt to speculate on possible deviations from current law.

Growth in National Health Expenditures (NHE), Gross Domestic Product (GDP), and the Health Share of GDP, 1990-2025 2025: 19.9% 2015: 17.8% Health Share Of GDP Projected NHE Growth 2016-25 Avg. Annual Growth: 5.6% Nominal GDP Growth 2016-25 Avg. Annual Growth: 4.5% Source: S. Keehan et al, “National Health Expenditure Projections, 2016-25: Price Increases, Aging Push Sector To 20 Percent Of Economy.” Health Affairs. 2017; 36(3): published online 15 February 2017.

2015 NHE Pre-release Meeting October 28, 2016 Preliminary and Confidential

Sponsor National Health Expenditure Projections, 2016–25 Federal, state and local governments are projected to sponsor 47 percent of national health spending by 2025 (from 46 percent in 2015). Average annual growth of 5.9 percent per year for 2016-25 mainly influenced by Medicare and Medicaid spending growth, as well as premium and cost-sharing subsidies for Marketplace plans. Private businesses, households, and other private payers are projected to sponsor 53 percent of national health spending by 2025 (from 54 percent in 2015). Average growth of 5.4 percent per year for 2016-25 mainly influenced by growth in out-of-pocket and private health insurance premium contributions sponsored by these sources.

Health Insurance Enrollment Enrollment (millions) 2013 2015 2016 2025 Private Health Insurance 187.6 197.3 199.1 207.1 Medicare 51.3 54.3 56.1 72.0 Medicaid 59.0 69.3 71.1 79.9 Average annual % change from previous year shown: 2.6% 0.9% 0.4% 2.9% 3.3% 2.8% 8.4% 1.3% SOURCE: Data from Exhibit 2. S. Keehan et al, “National Health Expenditure Projections, 2016-25: Price Increases, Aging Push Sector To 20 Percent Of Economy.” Health Affairs. 2017; 36(3): published online 15 February 2017.

Per Enrollee National Health Expenditure Projections, 2016–25 Private Health Insurance – growth projected to decelerate after 2017 as a result of higher cost-sharing requirements and slowing growth in disposable personal incomes. Medicare – growth projected to accelerate as increases in use and intensity of medical services come closer to longer-term historical experience. Medicaid – growth projected to accelerate as a result of an increasing proportion of relatively expensive aged and disabled enrollees. Per Enrollee Expenditure Growth (from previous year shown) 2016* 2017 2019 2025 Private Health Insurance 4.9% 5.9% 5.2% 4.6% Medicare 1.6% 3.0% 4.1% 4.7% Medicaid 1.1% 1.8% 4.2% 4.8% *This column represents growth in 2016 only. SOURCE: Data from Exhibit 2. S. Keehan et al, “National Health Expenditure Projections, 2016-25: Price Increases, Aging Push Sector To 20 Percent Of Economy.” Health Affairs. 2017; 36(3): published online 15 February 2017.

A Detailed Review of Key Findings by Time Period

Overview of 2016 Projection Annual Growth in NHE Growth in NHE is expected to decelerate in 2016 due to slower growth in Medicaid and private health insurance Medical price growth is projected to accelerate from a recent historic low of 0.8 percent in 2015, to 1.3 percent in 2016 Uninsured population projected to fall by 1.2 million to 28.0 million NHE 2016: NHE 4.8%, $3.4 trillion 2014: 5.3%, 2015: 5.8% Medical prices, 2015: 0.8%, 2016: 1.3%. Economy wide inflation 1.3% Uninsured: Falls 1.2 million to 28 million SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2019 2025

Key Findings for 2016 Projection Annual Growth For Major Payers, 2015 and 2016 Projected slower growth in spending for PHI and Medicaid are partially offset by faster growth in Medicare and out-of-pocket spending. Slower enrollment growth largely explains the slower growth in Medicaid and PHI spending. Projected faster growth in Medicare largely reflects an increase in enrollment, while an increasing share of PHI enrollees in high-deductible health plans underlies faster projected growth in OOP spending. Medicaid, 2015: 9.7%, 2016: 3.7%. MCAID enrollment, 2015: 5.7%, 2016: 2.6%. Mdcd Net Cost fell 2015: 24.9%. 2016: 5.2%, Mdcd hosp 2015: 9.5%, 2016: 4.5% lower reimbursement rates. PHI Enrollment, 2015: 2.6%, 2016: 0.9%, PHI Spend: 2015: 7.2%, 2016: 5.9% Medicare enrollment 2015: 2.7%, 2016: 3.3% OOP: Greater share of enrollees in higher cost-sharing plans SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2019 2025

Key Findings for 2016 Projection Annual Growth For Major Sectors, 2015 and 2016 Prescription Drugs: slower projected growth in 2016 due to reduced use of specialty drug treatments for Hepatitis C and an increase in the dollar value of brand-name drugs losing patent protection. Physician & Hospital: decelerating growth in use driven by slowdowns in growth for Medicaid and private health insurance enrollees (faster price growth offsets that trend in physician sector). Drugs spend, 2015: 9%, 2016: 5%, due to lower use of specialty drugs and lower prices Phys: 2015 prices -1.1%, 2016 prices: 0.2% Hospitals: Medicare documentation and coding, productivity adjustments under ACA. Reduced use. SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2019 2025

Key Findings for 2017 Projected Growth by Payer Medicare: projected growth driven by higher expected hospital, physician and clinical services spending. PHI: faster expected growth partially due to rising premiums to correct for prior underpricing. Medicaid: slower projected enrollment growth offset by accelerating growth in spending per enrollee. NHE 2017: 5.4% Medicare hosp accelerates PHI enrollment 2016: 0.9%, 2017: 0.5%. Rising per enrollee, higher marketplace premiums and elimination of risk corridor. PHI per enrollee 2016: 4.9%, 2017: 5.9% Mdcd per enrollee accel, Mdcd enroll decel, spend stays constant at 2017: 3.7% Mdcr: two midnight rule and readmission penalties SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2019 2025

Key Findings for 2017 Projected Growth by Sector Medical prices: input price growth projected to accelerate along with economy-wide price inflation, mitigated somewhat by slower growth in prescription drug prices. Prescription drugs: growth projected to accelerate due to faster growth in the number of prescriptions dispensed. Physician: slower expected growth as the effects of the coverage expansions continue to moderate. Drug spend 2017: 5.7%, increased use offset by patent expirations Hosp spend 2017: 5.0%, 2016: 4.9%. Phys and clinical 2016: 6.6%, 2017: 5.9% as covg expansions moderate for PHI and Mdcd Medical prices 2016: 1.3%, 2017: 1.6%. Economy wide inflation 2017: 2% SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2019 2025

Key Findings for 2018-2019 Average Annual Growth For Major Payers Medicare: growth in use and intensity of medical services projected to accelerate from historic lows towards rates more consistent with the program’s longer-term historical experience. Medicaid: expected faster growth in use and intensity to meet the needs of increasingly larger share of enrollees who are aged and disabled. PHI: growth in per enrollee spending expected to slow partly related to increases in the relative price of health care. NHE Growth 2018-19: 5.9%, driven by Medicare and Mdcd, offset by PHI Mdcr 2018-19: 7.1% from increased used and intensity. Mdcd larger share of aged and disabled enrollees. Net cost 2017: (-) Collect risk mitigation 2018: 18.8% Relative price of health care increases. PHI per enrollee 2017: 5.9%, 2018-19: 5.2%. PHI spend dec from 2017: 6.5% to 2018-19: 5.7% SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2018 2019 2025

Key Findings for 2020-2025 Average Annual Growth For Major Payers Medicare: growth is projected to accelerate driven by expected faster increases in use and intensity. Medicaid: projected growth similar to 2018-19 as a net result of slower enrollment growth offset by faster growth in spending per enrollee. PHI: growth influenced by changes in real disposable personal income and increased cost sharing from excise tax. NHE 2020-25: 5.8%, tad lower than 5.9% for 2018-19. Mdcr per enrollee, 2015: 1.7%, 2020-25: 4.7%, 1990-2007: 6.8% Mdcd per enrollee accel, enrollment decel, spend steady PHI: Excise tax in 2020. Disposable personal incomes. Relative price of health care. Medical prices 2020-25: 2.7%, Inflation: 2.2%. Medical prices 1990-2007: 3.3% SOURCE: CMS, Office of the Actuary, National Health Statistics Group. 2016 2017 2019 2020 2025

Major Findings National Health Expenditure Projections, 2016–25 For 2016-25, health spending is projected to grow at an average rate of 5.6 percent per year due to faster growth in medical prices from historic lows and slower growth in the use and intensity of medical services (relative to ACA coverage expansion experience in 2014 and 2015). Health spending is projected to grow 1.2 percentage points faster than Gross Domestic Product (GDP) per year over this period; the health share of GDP is expected to rise from 17.8 percent in 2015 to 19.9 percent by 2025. Federal, state and local governments are projected to sponsor 47 percent of national health spending by 2025 (from 46 percent in 2015). The insured share of the population is projected to increase from 90.9 percent in 2015 to 91.5 percent in 2025. NHE growth 2016-25 5.6%. Higher prices, lower use and intensity. 19.9% of GDP by 2025 Federal, state, and local govts 47% of NHE by 2025. Insured as pct of pop 2015: 90.9%, 2025: 91.5%. Due to continued cost pressures associated with paying for health care, employers, insurers and other payers will continue to pursue strategies to effectively manage the use and cost of health care goods and services.