of growth of health spending holding health status constant. For more than four decades, health spending growth has exceeded GDP growth. As shown in Table 9-1, excess cost growth—defined as the difference between age-adjusted per capita health spending growth and per capita GDP growth—averaged 2 percent from 1975 to 2007 and 1.5 percent from 1990 to 2007. As a result, the share of health spending in GDP increased from 8 percent in 1975 to 16 percent in 2007.6

Most analysts believe that this rapid rise in spending in large part reflects the increasing value that our society has been placing on health care as we become richer, which has fueled the demand for new medical technologies and services (Smith, Newhouse, and Freeland, 2009). But health spending cannot continue to rise in excess of GDP forever, and it is likely that the growth in demand for health services will slow over time as expenditures on health increasingly crowd out spending on other goods and services.7 However, there is little basis to predict by what means and at what rate that slowdown will occur. Many researchers believe that there is a considerable amount of inefficiency in our health system, and so part of the slowdown in spending could come from efficiency improvements. In addition, greater financial pressures on providers will likely lead to a slowdown in the rate of adoption of new technologies. The Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid Services (CMS) both assume that excess cost growth in health spending will decline over time, although their assumptions about the rate of decline differ, particularly for Medicare.8

In the past, Medicare beneficiaries have received the same type of care from the same providers as those having other forms of insurance, and Medicare and other health spending have increased at similar rates (Table 9-1). However, the health reform measures enacted in 2010 (the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively known as the Affordable Care Act, or ACA) included provisions to lower the annual updates to provider payment rates and to cap annual Medicare growth. According to the 2011 Trustees’ projections, with these payment changes, average excess cost growth for Medicare spending under the ACA will be close to zero over

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6The share increased to 18 percent in 2009, but this sharp increase reflects the effects of the severe economic downturn, which lowered GDP more than it lowered health spending.

7When health spending is a small share of the budget, it can increase rapidly without having a large effect on other spending. As health spending becomes a larger and larger share of the budget, rapid rates of growth increasingly require large adjustments in the growth rate of other spending.

8In particular, the CBO assumes that, under a current law framework, the Medicare program will have less flexibility than states and private insurers to take measures to slow the rate of health spending, and thus that Medicare excess cost growth will not slow as much as that of private health spending.



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