According to annual government projections published today in Health Affairs, U.S. health care spending is expected to have reached $2.5 trillion in 2009—up an estimated 5.7 percent since 2008 despite a projected decline in the gross domestic product (GDP) in the same period. As a result, health care’s share of the economy grew 1.1 percentage points in 2009, to a projected 17.3 percent. This represents the largest one-year increase in GDP share since the federal government began keeping track in 1960, federal analysts report on the journal Health Affairs‘ Web site.

The 11-year health care spending projections, prepared annually by economists at the Centers for Medicare and Medicaid Services (CMS), reflect the substantial influence of the economic recession on both public and private health care spending as more Americans lose their private health insurance and as federal and state governments face projected increases in Medicaid enrollment and spending.

According to the report, health spending by public payers is expected to have grown much faster in 2009 (8.7 percent growth, to $1.2 trillion) than that of private payers (3.0 percent growth, to $1.3 trillion). The CMS analysts attribute this predicted growth in public spending in 2009 to projected growth in Medicaid enrollment (6.5 percent) and spending (9.9 percent) as a result of increasing unemployment related to the recession. Conversely, enrollment in private insurance is expected to have declined 1.2 percent in 2009, despite federal subsidies for Americans who have lost their jobs to extend their private insurance coverage via the Consolidated Omnibus Budget Reconciliation Act (COBRA) that increased participation in these plans.

The CMS projections are discussed in various media outlets, including the Wall Street Journal, the Associated Press, the Los Angeles Times, the New York Times and the Times‘ health blog Prescriptions, and Reuters. The projections do not consider major health care reform legislation currently being discussed in Congress. Should reform come to pass, a second paper presenting projections based on the new law will be forthcoming in Health Affairs. (The journal recently published the CMS health spending report for 2008.)

For 2009 through 2019, health spending is expected to grow at an average annual rate of 6.1 percent—1.7 percentage points faster than GDP, the CMS analysts say. During that time, public spending (7.0 percent average annual growth) is projected to continue increasing faster than private spending (5.2 percent average annual growth).

The CMS projections predict that public payers will be paying for slightly more than half of the health care purchased in the U.S. by 2012, compared to 47 percent in 2008. However, at a February 3 Washington D.C. briefing, lead author Christopher Truffer noted that public spending is actually likely to surpass 50 percent of total spending a year earlier, in 2011. Truffer explained that, while the CMS projections are based on current law, Congress is likely to block impending cuts in Medicare physician payments, as it has repeatedly in the past.

The CMS report projects that despite anticipated growth in the overall economy in 2010, total health spending growth will slow down this year but will begin to accelerate again in 2011, with public spending continuing to grow faster than private spending. By 2019, national health spending is projected to nearly double, reaching $4.5 trillion and consuming 19.3 percent of the GDP.

With regard to the problems of the uninsured and health care cost growth, the two key issues leading to interest in health reform, the new CMS projections indicate that “nothing much has changed,” said Richard Foster, CMS’ Chief Actuary, at the February 3 briefing. “All that is still there, all that argues that some form of health care reform is a good idea,” said Foster.

Medicare and Medicaid

Medicare spending is expected to have reached $507.1 billion in 2009, an increase of 8.1 percent from 2008. This is less than the 8.6 percent growth seen in 2008 and is related to slower projected growth in prescription drug and hospital spending. If a mandated 21.3 percent physician payment rate cut goes into effect in 2010, total Medicare spending growth is projected to slow dramatically to 1.5 percent in that year (and growth in total health spending would be expected to slow to 3.9 percent). Between 2011 and 2019, Medicare spending growth is expected to average 7.4 percent annually as increasing numbers of baby boomers become eligible to enroll.

Medicaid expenditures are projected to have grown 9.9 percent, to $378.3 billion, in 2009—the fastest annual growth rate since 2002. Analysts attribute the growth to rapidly increasing Medicaid enrollment among nondisabled children and adults as a result of many losing employment. Comparatively high growth rates in Medicaid spending and enrollment are expected to continue in 2010, and then average 7.5 percent per year between 2013 and 2019. Total Medicaid expenditures are projected to reach $794.3 billion in 2019.

Private Health Insurance

As effects of the economic recession continue, spending on private health insurance premiums is expected to have risen slightly to $808.7 billion in 2009, climbing 3.3 percent compared to 3.1 percent in 2008. This steady rate of growth is the net result of the number of people who have lost private health insurance coverage along with their jobs offset by an increase in the number of people able to continue private coverage through expanded COBRA. With those subsidies set to expire in 2010, private health insurance premium spending is projected to decrease slightly in 2010 and begin increasing more quickly in subsequent years as the economy recovers. On a per enrollee basis, private health insurance premium spending is expected to have grown 4.6 percent in 2009, up from 3.6 in 2008.

Out-Of-Pocket Spending

The economic recession is also expected to slow growth in out-of-pocket spending, from 2.8 percent in 2008 to 2.1 percent in 2009. Out-of-pocket spending is expected to have reached $283.5 billion in 2009. The slower growth is attributable to several reasons, including lower personal incomes due to the recession and less out-of-pocket spending by new Medicaid enrollees. While spending on out-of-pocket expenses historically has grown more slowly than spending on private health insurance premiums, the two are projected to grow at roughly 6.0 percent annually between 2014 and 2019 because cost-sharing requirements are expected to continue to increase.

Other Highlights From The Report:

Hospitals. Total hospital spending is expected to have grown from 4.5 percent in 2008 to 5.9 percent in 2009, reaching $760.6 billion in 2009. This reflects a projected acceleration in hospital spending by public payers—up from 6.2 percent in 2008 to 8.0 percent in 2009—due to increased enrollment. It also reflects growth in private hospital spending, which is projected to have increased to 3.1 percent in 2009, up from a 12-year-low of 2.3 percent in 2008. By 2019, total hospital spending is expected to reach nearly $1.4 trillion.

Physician and clinical services. Growth in spending on physician and clinical services is expected to have accelerated to 6.3 percent in 2009, up from 5.0 percent in 2008. Total expenditures are expected to have reached $527.6 billion in 2009. The expected increase is driven primarily by Medicaid spending in this category, which is projected to have grown 10.3 percent in 2009, compared to 8.9 percent in 2008. Projected private spending in this category also accelerated, to 4.7 percent in 2009, up from 3.6 percent in 2008, due in part to care associated with the H1N1 virus.

Prescription drugs. Prescription drug spending growth is expected to have grown 5.2 percent in 2009, reaching $246.3 billion. This 2.0 percentage point acceleration from 2008 is due to an increase in per person use of drugs, driven by the need for antiviral drugs to treat H1N1, and by higher price growth in brand-name drugs. By 2019, prescription spending is projected to reach $457.8 billion, with spending growth expected to accelerate over the projection period due primarily to increases in drug prices.