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Health Outlays May Hit $2.5 Trillion in 2009


The recession is slowing private-sector health-care spending, but Medicare, Medicaid, and other public payers are picking up the slack

The recession is shifting health-care costs from the private to the public sector, but it isn't making medical spending any less burdensome. Federal economists project that total U.S. health-care spending will reach $2.5 trillion this year, $1 billion more than last year. The health share of the gross domestic product is expected to rise to 17.6% from 16.6% in 2008, its largest single-year increase ever, mainly because the GDP is expected to shrink this year for the first time since 1949.

The annual study, published in the journal Health Affairs by researchers at the Centers for Medicare & Medicaid Services, estimates that health spending will grow an average of 6.2% each year between 2008 and 2018. That's 2.1 percentage points higher than the average annual growth in the overall GDP. By 2018, national health-care spending is projected to nearly double, to $4.4 trillion, consuming 20.3% of GDP. And this is without calculating the impact of any health-care reforms, which are sure to raise costs over the near term. President Barack Obama is expected to outline his plans for health-care reform on Feb. 24.

The U.S. already spends more than twice the share of its GDP on health care than any other industrialized country, with no better outcomes, a state of affairs that most economists and company officials complain weighs mightily on the nation's global competitiveness. Consequently, there is a growing consensus among politicians and the health-care industry that some level of health-care reform is a must. Obama said during his campaign that he wants to decrease the number of uninsured, both by penalizing large employers who do not offer insurance and by setting up a new public insurer, a plan the Congressional Budget Office estimated could cost up to $65 billion to implement. Economists agree, however, that ultimately efforts to cover the uninsured and lower costs, though expensive in the short term, are critical to bringing long-term health-care inflation under control.

The government's economists say the projected growth in the overall economy and a decline in private health insurance coverage due to layoffs should dampen private-sector health-care spending, bringing the increase to a 15-year low of 3.9% this year. Public health spending will make up the difference, however, with spending accelerating by 7.4% this year.

Boomer Retirees

All of this, though, is just the lull before the storm that will hit in the next decade. Health-care spending will rapidly accelerate in 2011 as the economy improves and the first wave of the Baby Boom becomes eligible for Medicare. By 2018, annual health-care inflation should reach 7.2%, and government payers such as Medicare, Medicaid, and public health agencies are expected to pay for more than half of all national health spending, up from about 40% now.

The researchers caution that there are many uncertainties in their projections, such as the length of the economic downturn and potential health-care reforms that could extend coverage to the uninsured. For example, the researchers based their estimates on the assumption that physician payments would be cut 21% as required by a federal statute called the Sustainable Growth Rate. But Congress has overturned that pay cut every year since it went into effect in 2003.

The biggest contributors to health-care inflation over the next 10 years will probably be hospitals and physician charges, the researchers note. Prescription-drug spending growth slowed from 4.9% in 2007 to 3.5% last year as patients switched to generics, but the researchers expect new specialty drugs to be approved in the coming years, causing prescription spending to almost double, to $453.7 billion by 2010.

Arnst is a senior writer for BusinessWeek based in New York.

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