Health Debate Obscures

Cost of Medical Care

Debates over health reform in Washington often obscure two critical issues:

First, the rate of increase in Medicaid spending is projected at 5.9 percent per year between 2018 and 2025, according to the federal Centers for Medicare and Medicaid Services (CMS). While Democrats and Republicans disagree on how to control spending, most experts in both parties recognize the need to at least slow the rate of increase.

To put the growth in context, the non-partisan Congressional Budget Office projects that the U.S. economy will expand at an average annual rate of 2.1 percent between the fourth quarter of 2016 and the fourth quarter of 2018. In other words, at least in the next year-plus, Medicaid spending is forecast to increase at a rate more than 2½ times the growth in the economy.

Second, almost all the health reform discussion in Washington and St. Paul has been about WHO pays, not the cost of WHAT we are buying. That is, debate over the Democratic “Medicare-for-all,” Republican alternatives to Obamacare and other plans focus on whether government (state or federal), employers, individuals or someone else will pay the insurance premiums. What rarely is discussed is the actual cost of medical care.

The federal CMS estimates that total health spending will increase from about one out of every six dollars spent in the U.S. economy today to nearly one-out-of-every-five-dollars by 2025. According to CMS, “growth in national health expenditures is driven by projected faster growth in medical prices.”

Leading the way, according to the CMS analysis, will be prescription drugs. The rate of increase in drug prices is projected to peak in 2018 at 7.6 percent, then decline a bit. Still, the average annual rate of increase between 2016 and 2025 is forecast to be 6.3 percent.

These trends will put enormous pressure on Minnesota’s state budget. The state already is spending about as much on health programs as it does on K-12 education. While the rate of increase will slow, the trend is unmistakable. As the chart shows, about one-third of all Minnesotans receive their health coverage from public programs, including Medicare and Medicaid. That’s a dramatic change from 2001 when more than two-thirds of Minnesotans were covered by employer-sponsored plans.

HB perspectives

A particular challenge for Minnesota budget managers will be the growing number of elderly. According to one estimate, the median cost of a semi-private nursing home room will increase from about $98,000 today to almost $132,000 in 10 years. Because state and federal governments pay about two out of every three dollars spent on long-term care, the implications for public budgets are enormous.

A good source of information on current and historical health spending is the Peterson-Kaiser Health System Tracker. The interactive tool allows you to look at how health spending in different categories has changed over time, the share of overall spending consumed by different services and the source of funds.