2023 saw a major surge in healthcare spending coming out of the COVID pandemic
One of my Christmas traditions is to write about the release of the Centers for Medicare and Medicaid Services (CMS) Actuary’s National Healthcare Expenditure Data (NHED) for a given calendar year. This usually is released in the middle of December each year for the prior year. It literally takes CMS about a year to capture, calculate, and categorize all the data for a year given the size and labyrinthine complexity of our healthcare system. Each year as well, usually in the first half of June, the CMS Actuary updates healthcare spending projections for ten outyears.
Why is this so important? First, it is the main comprehensive source of data for calculating the history and future of healthcare spending. Most other studies rely in some form on the CMS Actuary’s NHED reports. Second, it is a treasure trove of data that helps explain the inner workings of the healthcare system. Here you will find data by line of business, by service type, source of payment, and more. Last, since it calculates the amount of gross domestic product (GDP) devoted to healthcare spending each year, it is the official statistic for how we are performing on the cost side against other developed nations.
Before we get into the specifics, in 2022 we saw the percentage of GDP devoted to healthcare decline, which was tied to the anomalies of federal COVID appropriations and spending over a few years. But the fact remains that America is a huge outlier in terms of healthcare spending in the developed world. I usually say that the United States spends anywhere from 33% to 100% more. This continues to hold true despite the decline reported by the CMS Actuary.
And as I often say, too, the value in the U.S. system is abominable. We spend the most by far of any developed nation, yet we rank dead last in terms of outcomes on a recent Commonwealth Fund study. It is not just that we are dead last, but that we are a quality outlier even against the lowest performing developed nations in the study. If you haven’t read it yet, see my September 23, 2024 blog at the blog tab of this site for complete details ( https://www.healthcarelabyrinth.com/commonwealth-fund-mirror-mirror-2024-a-portrait-of-the-failing-u-s-health-system-shows-how-much-of-a-healthcare-outlier-america-really-is/ ). In addition, my book, The Healthcare Labyrinth (available for purchase via this site), goes into detail about why we are so dysfunctional (using the NHED reports) and how we can close the gaps on costs and outcomes.
Let’s get to the findings from the CMS Actuary for 2023
Let’s dig into the numbers from the 2023 NHED. All the details can be found here: https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/historical . A great Infographic here: https://www.cms.gov/files/document/nhe-infographic.pdf . As well, the Peterson-KFF Health System Tracker released a National Health Spending Explorer, which tracks national healthcare expenditures since 1960. It is based on the CMS Actuary data. You can find it here: https://www.healthsystemtracker.org/health-spending-explorer/
Some NHED findings for 2023:
- Total national healthcare expenditures grew by $342 billion from 2022 to 2023 compared with $198 billion from 2021 to 2022. The 2023 expenditures were $4.867 trillion.
- U.S. healthcare spending grew 7.5% from 2022 to 2023, compared with 4.6% from 2021 to 2022 and 4.2% from 2020 to 2021. Growth in 2023 was up considerably from 2021 and 2022. It is clear we are now in years of accelerated utilization and at least some inflation coming out of the COVID years.
- The share of Gross Domestic Product (GDP) devoted to healthcare rose to 17.6% in 2023, compared with 17.4% in 2022. This represents our customary high range for the share of GDP devoted to healthcare. It is lower than the 19.5% in 2020 and 18.3% in 2021, but those years had major government spending due to the COVID pandemic that went into the healthcare expenditure calculation.
- The acceleration in healthcare spending growth reflected growth in non-price factors, such as the use and intensity of services. When adjusted for healthcare price inflation (as measured by the National Health Expenditure (NHE) deflator), real healthcare spending increased 4.4% in 2023 — higher than the 1.4% in 2022 and higher than the growth rate of real GDP, which was 2.9% in 2023. This makes sense as there was pent up service demand coming out of the COVID pandemic.
- In 2023, private health insurance and Medicare spending grew faster than in 2022, while Medicaid spending and enrollment growth slowed as the COVID-19 public health emergency ended and some enrollment was shed from the program with the return of redeterminations.
- We also saw a historic high of 92.5% insured, up from 92% in 2022. This occurred despite the slowing of Medicaid enrollment growth. Much of the increase in coverage occurred in the Exchanges. Still, a rough 8% uninsured rate remains a huge crisis for America when the rest of the developed world averages a 1% uninsured rate. And this Exchange growth is at risk if the enhanced premium subsidies expire at the end of 2025.
- Hospital care represented 31% of total healthcare expenditures. Spending for hospital care increased 10.4% in 2023 and reached $1.5 trillion. This rate of growth was the fastest since 1990. Again, this was due to the pent-up demand post COVID pandemic. The use of and intensity of hospital services surged. Both inpatient and outpatient hospital care went up dramatically.
- Spending for physician and clinical services increased 7.4% to $978.0 billion in 2023, which was faster than the growth rate of 4.6% in 2022. Again, the use and intensity of services was responsible for the surge.
- Retail prescription drug spending increased 11.4% to $449.7 billion in 2023, accelerating from a rate of 7.8% in 2022. The faster growth was experienced by both private health insurance spending, which grew 13.8% in 2023 following an increase of 3.5% in 2022, and Medicare spending, which increased 12.2% in 2023 after 9.0% growth in 2022. The rapid growth in spending for drugs used to treat diabetes and obesity contributed to faster overall growth in retail prescription drug expenditures.
- Private health insurance represented a 30% share of expenditures. Spending for private health insurance reached $1.5 trillion in 2023 and increased 11.5%. The robust growth in 2023 was driven by increased enrollment in the Exchanges and employer-sponsored health insurance, strong spending growth for services, and strong growth in the net cost of insurance. In 2023, enrollment in private health insurance increased 1.6 percent or 3.3 million individuals.
- Medicare represented a 21% share of expenditures. Medicare spending reached $1.0 trillion in 2023, increasing 8.1% following 6.4% growth in 2022. A turnaround in traditional Medicare fee-for-service spending growth (from a decline of 1.4% in 2022 to an increase of 1.7% in 2023) drove the faster growth. Medicare Advantage private plan spending growth remained strong, increasing 14.7% in 2023 following 15.7% growth in 2022. Total Medicare enrollment grew 2.1% percent in 2023.
- Medicaid represented an 18 percent share of expenditures. Medicaid spending increased 7.9% to $871.7 billion in 2023, a slower growth rate than in 2022 (9.7%) and 2021 (9.5%). In 2023, average Medicaid enrollment slowed dramatically, increasing 0.8% from 7.5% in 2022, and reached 91.7 million even as states resumed the redetermination of Medicaid eligibility.
- Total out-of-pocket spending increased by 7.2% in 2023 to $505.7 billion, a slight acceleration from growth of 6.9% in 2022. That shows the cost crunch the American public sees every day.
- Government health insurance expenditures have surged over the past few decades and have become the largest source of healthcare funding.
What does it all mean?
We are seeing a robust return of utilization. Because prices are not controlled in our healthcare system and value-based care is still in its infancy, such robust utilization will continue to drive healthcare spending up each year and eat up more and more of economic output. I also suspect we will see rising inflation, which will add to the costs. Drug prices and utilization will also play a role in driving up costs even more.
The CMS Actuary will update predictions for the long term in June 2025. In June 2024, the CMS Actuary projected healthcare spending would be $4.799 trillion in 2023. It came in at $4.867 trillion – a $68 billion difference. At the time, the CMS Actuary said healthcare spending would grow to $7.705 trillion by 2032. Using actual 2023 expenditures, that is a growth of 58.3% in 9 years – or 6.5% on average. Using the original 2023 estimate, that is a growth of 60.6% — or 6.7% on average. Healthcare spending would represent 19.7% of GDP – roughly that one-fifth magic number we often worry about.
Without major reform, we are faced with a few problems.
- While some healthcare spending can be deemed good spend, the reality is most of it is not and healthcare will crowd out economic growth and constrain business growth.
- More Americans will become uninsured and underinsured. The CMS Actuary says the number of uninsured will grow from 24.9 million in 2023 to 32.8 million in 2032.
- Healthcare will become more and more unaffordable. Out-of-pocket costs are expected to grow from $506 billion in 2023 to $749 billion in 2032, a 48% increase. While this is less than the 58 to 61% expected overall growth, it is clear that real wages won’t increase that much over time.
In the end, healthcare reform is a must for America. As I say in The Healthcare Labyrinth, the three keys are affordable universal coverage, a pivot to care management, and price reform.
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— Marc S. Ryan
