Economic Engine or Runaway Train?
In June, the Office of the Actuary (OACT) at the Centers for Medicare & Medicaid Services (CMS) released its annual National Health Expenditure (NHE) data with projections through 2032.[1] CMS projects that NHE will exceed $5 trillion in 2024 and reach $7.7 trillion in 2032. For perspective, U.S. healthcare spending ranks as the third largest GDP in the world.[2]
In comparing 2024 to 2032, the distribution of personal healthcare expenditures among the 10 service categories look quite similar, although a there will be a slight shift to Long-Term Services and Supports (LTSS) reflecting our aging population. In 2030, there will be more Americans aged 65 or older than those 18 or younger for the first time in U.S. history.
Healthcare expenditures are not evenly distributed across age groups. Rather, the spending pattern resembles a fishhook—costs are concentrated in the first year of life and in the last year of life. Healthcare spending per person start high, then decline during childhood, adolescence, and climb slowly through working age adulthood. Costs per person then increase again after retirement age and spike in the last year of life. Out of our population of more than 330 million people, there were 3.67 million births in 2022.[3] The number of deaths were 3.28 million in 2022.[4]
Table 1 below illustrates the distribution of personal healthcare expenditures by service categories in 2024 and 2032.
| Service Category | 2024 | Percent of Total | 2032 | Percent of Total |
|---|---|---|---|---|
| Hospital Care | $1,559.6 | 36.7% | $2,366.3 | 36.2% |
| Physician and Clinical Services | $1,006.5 | 23.7% | $1,522.1 | 23.3% |
| Other Professional Services | $168.8 | 4.0% | $250.2 | 3.8% |
| Dental Services | $185.2 | 4.4% | $266.5 | 4.1% |
| Other Health, Residential and Personal Care | $284.1 | 6.7% | $469 | 7.2% |
| Home Healthcare | $154 | 3.6% | $282.7 | 4.3% |
| Nursing Care Facilities and Continuing Care Retirement Communities | $216.3 | 5.1% | $337.4 | 5.2% |
| Prescription Drugs | $463.6 | 10.9% | $728.5 | 11.2% |
| Durable Medical Equipment | $75.3 | 1.8% | $114.7 | 1.8% |
| Nondurable DME | $137.2 | 3.2% | $194.8 | 3.0% |
| Total Personal Healthcare Expenditures | $4,251.2 | $6,532.3 |
National Health Expenditures also include categories of spending that are not directly related to patient care. The changes in these categories from 2024 and 2032 are illustrated in the table below.
| Category | 2024 | Percent of Total | 2032 | Percent of Total |
|---|---|---|---|---|
| Government Administration | $58.1 | 7.3% | $82.6 | 7.0% |
| Net Cost of Private Insurance | $328.2 | 41.1% | $534.7 | 45.6% |
| Government Public Health Activities | $165.2 | 20.7% | $198.1 | 16.9% |
| Research | $71.3 | 8.9% | $103.0 | 8.8% |
| Structures and Equipment | $174.8 | 21.9% | $254.4 | 21.7% |
| Totals | $797.6 | $1,172.8 |
What we call the “healthcare system” is comprised of medical services and non-medical services in nature (paid LTSS, unpaid LTSS caregivers, Health-Related Social Needs (HRSN)) loosely connected by a “health information” system. To make these systems functional requires substantial spending for Information Technology (IT), legal services, accounting services, financial services, construction and more. Yet these distinct parts are still fragmented and patient care often suffers due to broken communications and poor coordination among patients, providers, payers, plans, producers, and processers.
Poor communication and coordination result in excess costs caused by under-utilization of high value, low cost services (preventative services), and over-utilization of care in less appropriate settings (emergency departments for non-emergent care). Two of the major challenges ahead is to fill the gaps in the “continuum of care,” especially in rural America, and create a truly effective and efficient system in which communication is constant, accurate, and timely.
Healthcare is heavily subsidized in the United States. Even care covered by the private sector, the cost of medical insurance and care for employees and their families is lessen by the tax code. OACT illustrates the shift in the sources of payment for healthcare from private sector to the public sector, principally to Medicare and Medicaid. The shift between 2024 and 2032 is shown in the following table.
| Source of Funds | 2024 | 2032 |
|---|---|---|
| Out-of-Pocket | 12.8% | 11.5% |
| Out-of-Pocket | 32.6% | 30.2% |
| Medicare | 23.5% | 27.2% |
| Medicaid | 17.4% | 27.2% |
| Other Health Insurance (Children’s Health Insurance Program, Department of Defense, Department of Veterans’ Affairs) | 4.5% | 4.3% |
| Other Third Party (Worksite healthcare, workers’ compensation, other private revenues, other federal, state, and local programs | 9.3% | 8.6% |
Our GDP in 2024 is expected to reach $28.49 trillion and $39.16 trillion in 2032. As a percentage of the Gross Domestic Product (GDP), NHE is expected to grow from 17.7% to 19.7%. In accounting for a greater share of the GDP, healthcare spending may be viewed as an economic engine. The healthcare sector currently employs 17.7 million people (11% of all employees).[5] The median pay for healthcare practitioners and technical occupations was $80,820 in May 2023 compared to the median annual wage of $48,060 for all occupations.[6] In many communities, hospitals are among the largest and best paying employers. Healthcare is adept at creating new kinds of workers with over 50 occupational classifications.
However, the shift in the sources of funding to Medicare and Medicaid may also be threatened by the national debt of $35.18 trillion which now exceeds GDP, not to mention unfunded liabilities looming ahead.[7] Medicare is only partially funded through payroll taxes and beneficiary contributions. As OACT released its projections of NHE expenditures in June, the Congressional Budget Office (CBO) also released its Update to the Budget and Economic Outlook: 2024 to 2034. According to CBO, net interest on the debt will cost $892 billion this year which exceeds the federal cost of Medicaid, CHIP, and subsidies for purchasing individual coverage in the Marketplace.[8]
Something has to give. Lowering the growth in healthcare cost to the same percentage of GDP and addressing the improper payment levels in Medicare and Medicaid would make a significant difference. Next year is the 60th anniversary of Medicare and Medicaid. After all this time, the payment structures are still substantially based on cost-based fee schedules, even in the private sector. Economics tell us that price fixing is never the answer over time.
The solution lies in rethinking how services, especially LTSS services are delivered, where they are delivered, and by whom are they delivered with an absolute focus on total cost of care rather than individual service categories. Closing the gaps in the continuum of care supported by constant communication and coordination are vital in order to improve health outcomes and lower costs.
