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December 6, 2019

US health spending reached $3.65T in 2018. What drove the growth?

Daily Briefing

    U.S. health spending growth increased at a faster rate in 2018 when compared with 2017, in part because the net cost of health insurance rose more quickly due to the return of the Affordable Care Act's (ACA's) health insurance tax, according to a CMS report released Thursday.

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    National health expenditure findings

    Overall, CMS actuaries found national health spending increased by 4.6% from 2017 to 2018, reaching $3.65 trillion. The 2018 growth rate was up from 4.2% in 2017, which had fallen from 4.6% in 2016.

    The actuaries found that health spending growth in 2018 did not outpace spending growth for the overall economy, which measured 5.4%. As a result, health care expenditures in 2018 accounted for 17.7% of the nation's total gross domestic product (GDP), down from 17.9% in 2017.

    According to the actuaries, U.S. health spending totaled $11,172 per person in 2018.

    What's driving the higher growth rate?

    The actuaries said 2018's slight acceleration in health care spending growth reflects:

    • Relative stability in spending growth since insurance expansions occurred under the ACA in 2014 and 2015; and
    • Faster growth in non-personal health care spending, particularly in the net cost of health insurance in large part because of the return of the ACA's health insurance tax.

    Aaron Catlin, co-author of the report and deputy director at the National Health Statistics Group, said, "We don't have an explicit measure of the direct impact of the [health insurance] tax, but we do have the estimates from the IRS in terms of expenditure amount. The health insurance tax was big enough to account for most of the acceleration and had a big impact on the three largest payers."

    The ACA's health insurance tax is intended to offset the costs associated with expanding health insurance coverage under the ACA. The tax, which Congress suspended for 2017 and 2019, cost insurers an estimated $14.3 billion in 2018—up from more than $11 billion in 2015 and 2016. The tax currently is scheduled to take effect again in 2020 and is projected to cost insurers $15.52 billion next year if it is not suspended.

    Private health insurance spending in 2018 grew by 5.8% to $1.2 trillion, up from 4.9% in 2017, according to the actuaries, and they attributed that growth in part to the health insurance tax. According to the actuaries, private health insurers continued to be the largest payers for health care in 2018, accounting for 34% of total health care spending.

    Medicare spending in 2018 grew by 6.4% to $750.2 billion, up from 4.2% in 2017. The actuaries found Medicare fee-for-service (FFS) spending in 2018 grew by 3.5%, up from 1.4% in 2017. The actuaries attributed 2018's Medicare growth rate to: 

    • Faster growth in the net cost of insurance of Medicare private health plans—mostly Medicare Advantage plans—under the ACA's health insurance tax;
    • Faster growth in Medicare spending for medical goods and services; and
    • An increase in government administration spending after a reduction in 2017.

    The growth rate for state and federal Medicaid spending also accelerated, rising from 2.6% in 2017 to 3% in 2018, with total Medicaid spending reaching $597.4 billion in 2018.

    The actuaries noted that health spending rate growth for the largest goods and service categories—hospital care, physician and clinical services, and retail prescription drugs—was mixed in 2018.

    For example, total hospital spending, which accounted for 33% of total health care spending in 2018, grew by 4.5% to $1.2 trillion last year, up from a growth rate of 4.7% in 2017. The actuaries found an acceleration in hospital price growth combined with slower growth in the use and intensity of hospital services drove steady growth in 2018. The actuaries noted that use slowed down as the uninsured population increased by one million people for a second year in a row, reaching a total of 30.7 million in 2018.

    Total spending for physician and clinical services, which accounted for 20% of total health care spending in 2018, grew by 4.1% to $725.6 billion last year, down from a growth rate of 4.7% in 2017.

    Further, the actuaries found retail prescription drug spending, which accounted for 9% of total health care spending in 2018, rose by 2.5% to $335 billion—up from 1.4% in 2017. That figure does not include drugs administered by physicians or hospitals. The actuaries attributed the faster growth to non-price factors, such as the use and mix of drugs being used by patients, which offset a 1% decline in prices for retail prescription drugs. According to the Wall Street Journal, that decline was the first drop in retail prescription drug prices that CMS' actuaries have reported since 1973.

    In addition, the actuaries found the growth rate for consumers' out-of-pocket spending accelerated from 2.2% in 2017 to 2.8% in 2018. According to the actuaries, faster growth in out-of-pocket spending for retail prescription drugs, durable medical equipment, and dental services offset a slowdown in out-of-pocket spending for hospital care in 2018.

    The actuaries also found that growth in household spending on health care in 2018 remained unchanged from 2017, at a rate of 4.4%. The stagnation in part stemmed from a slowdown in growth among household contributions to employer-sponsored private health insurance premiums, which decreased from a growth rate of 6.8% in 2017 to 3.4% in 2018, according to the actuaries.


    Steve Wojcik, VP of public policy for the National Business Group on Health, said, "I suppose it's a good sign that health care's percentage of total GDP dropped. It's not squeezing out as much spending on other things, but it's still squeezing out a lot."

    Gerard Anderson, a health policy professor at Johns Hopkins University, noted that the growth in the number of uninsured Americans is affecting health care spending. "The fact that 30 million Americans are uninsured means someone has to pay for their care, and that falls on the 300 million who have insurance," he said.

    Katherine Baicker, dean of the University of Chicago Harris School of Public Policy, raised concern that health care spending continues to grow while the value of care provided in the United States does not appear to be improving. "There is ample evidence we're still not getting the value from the health care system that we ought to in terms of improvements in health outcomes, given how much we're spending. Nothing in that story has changed," she said (Armour, Wall Street Journal, 12/5; Murad, Morning Consult, 12/5; Meyer, Modern Healthcare, 12/5; Owens, "Vitals," Axios, 12/6; Minemyer, FierceHealthcare, 12/5; Hartman et al., Health Affairs, 12/5).

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