Healthcare Spending to Pick Up Pace, Reaching $7.2T by 2031

Hospital spending to accelerate

Across all major sectors in the annual report, hospital spending is expected to grow the fastest, at 5.8 percent, on average, through 2031. Meanwhile, physician and clinical services spending will increase at 5.3 percent and prescription drug spending at 4.6 percent.

OACT researchers project hospital spending to accelerate, but growth will significantly vary through 2031. For example, hospital spending growth will slow to 4.8 percent in 2022 as hospitals experience staffing challenges and projected declines in private health insurance and out-of-pocket spending. Spending is estimated to increase faster in 2023 as these spending trends reverse and hospital prices increase because of inflation and higher labor costs.

Average price growth for hospitals is projected to increase faster at 3.2 percent during the whole period versus 2.2 percent for prescription drugs and 2.0 percent for physician and clinical services, according to the OACT report.

Hospital spending growth is projected to slow once again in 2024 because of Medicaid disenrollments. After that, growth will likely stabilize starting in 2025 when the industry can transition from PHE-related issues affecting utilization and spending. The youngest of the Baby Boomer generation will also age into Medicare. However, the payment rate cap on the Medicaid disproportionate share hospital program will partially offset growing expenditures.

Average price growth for hospitals is projected to increase faster at 3.2 percent during the whole period versus 2.2 percent for prescription drugs and 2.0 percent for physician and clinical services, according to the OACT report.

Growth in physician and clinical services spending will stabilize slightly sooner in 2024, OACT researchers estimate. Spending from private health insurance beneficiaries and price growth are projected to boost spending growth, while the reinstatement of sequestration-related cuts in Medicare, declines in COVID-19 relief funding, and Medicaid disenrollments will offset spending.

Similar to hospital spending, Medicare spending will contribute to greater physician and clinical services expenditures because of enrollment growth. By 2026, Medicare enrollment to outpace private health insurance signups.

Medicare spending on the rise

Among the major payers, Medicare will likely see expenditures rapidly rise. OACT projected a growth rate of 7.5 percent per year through 2031 versus 5.4 percent for private-payer spending and 5.0 percent for Medicaid spending.

Despite projected growth, the Medicare spending growth rate represents a deceleration in spending growth compared to the rate the previous year. Emergent care utilization slowed among Medicare fee-for-service beneficiaries, leading to slower spending growth along with the reintroduction of sequestration-based cuts.

Utilization and intensity of hospital services are projected to increase, resulting in faster Medicare fee-for-service per enrollee spending this year. Baby Boomers aging into Medicare will have a major impact on spending, OACT researchers add.

Medicare expenditures are expected to reach over $1.0 trillion in 2023, with a significant increase in growth from 4.8 percent in 2022 to 8.0 percent in 2023.

OACT researchers also project in the study that the insured share of the population to remain higher than 90 percent over the next couple of years. Despite projected Medicaid enrollment losses of up to 81.1 million by 2025, OACT expects further projected increases in enrollment in private health insurance from enhanced Marketplace subsidies.