When the Centers for Medicare & Medicaid Services (CMS) released the 2021-2030 National Health Expenditure (NHE) report, prepared by the CMS Office of the Actuary in March, the headlines across healthcare news media were consistent: “National health spending projected to top $6.8 trillion in 2030.”
Anyone familiar with health policy discussions has come to expect inclusion of the latest National Health Expenditure (NHE) report as a quick and reputable reference for understanding healthcare spending as a percentage of the gross domestic product (GDP). But few of us have taken the time to consider how these estimates are determined or their historical accuracy.
Calculating the NHE
The U.S. Department of Health and Human Services (HHS) first published what we know as the National Health Expenditure Accounts (NHEA) in 1964. At their most basic, they allow for quick understanding of who spent how much for what.
CMS characterizes the NHEA as estimates of total healthcare spending in the U.S. based upon expenditures for “health care goods and services, public health activities, government administration, the net cost of health insurance, and investment related to health care.” It includes all spending by Medicare, Medicaid, and private health insurers, along with out-of-pocket and other private expenditures.
Healthcare spending is inclusive of personal healthcare (PHC), health consumption expenditures (HCE), national health expenditures (NHE), government public health activity, government administration and the net cost of health insurance, and investment. According to the Office of the Actuary, the NHEA also includes any amount invested to secure future services.
CMS emphasizes that the NHEA are comprehensive, multidimensional, and consistent, allowing for meaningful comparisons across time and sectors. They are also rooted in assumptions about the larger GDP, disposable personal income, and employment rates.
To estimate the value of goods and services considered CMS relies on such data sources as the quinquennial Economic Census and the Service Annual Survey from the Census Bureau. For the purposes of the NHEA, CMS defines the U.S. population as the U.S. Census resident population plus the net undercount.
Like other federal statistical agencies, CMS uses the North American Industry Classification System (NAICS) to classify statistics related to the U.S. business economy.
CMS uses deflators to calculate prices, in an effort to account not only for inflation, but also for the fact that the rate of medical inflation is higher than the general rate. Deflators include the Bureau of Economic Analysis’s GDP Deflator, which is described as “measure of inflation in the prices of goods and services produced in the United States, including exports.”
Complicating factors
Given the sheer size of the U.S. economy and the vast amount of data used in compiling the NHEA, it is reasonable to expect that NHEA projections would routinely “miss the mark” when compared with CMS estimates of actual spending. In fact, the NHEA’s track record is remarkably good, especially for the earlier years in any projection period (2022 or 2023 in the 2021-2030 projection period, for example).
A 2020 data review by the CMS Office of the Actuary found that its projected spending growth rates were “within plus or minus 1.0 percentage point, on average, of their historical estimates.”
Still, the CMS Office of the Actuary has identified five categories of reasons for those instances in which there is significant difference between NHEA projections and estimates. These are exogenous and endogenous assumptions, changes in law, revisions to historical data, unforeseen developments in the health care industry, and data vintages.
Importantly, NHEA’s ten-year predictions are made on “current law” assumptions, meaning that they do not consider anticipated changes in laws or regulations, even those clearly on the horizon. This creates the potential for significant differences between projections and estimates in the cases of such legislation as the Affordable Care Act.
Unforeseen developments in the larger economy can impact the accuracy of projections. DPI is a key driver in CMS’s projection of private healthcare spending and an important example of a factor that can have cascading effects on the NHEA. An economic downturn that leads to a decline in DPI may also cause a shift in insurance enrollment, moving people from private insurance to Medicaid.
The pandemic has presented an extreme example of a complicating factor for NHEA—impacting the larger economy while having very specific effects on the healthcare sector. Those who look behind the scenes of the regular announcements of healthcare spending as a percentage of GDP will be watching closely to see how projections play out for this unique set of circumstances.