What's driving $4.9T in U.S. healthcare spending?

Hospital care: $1.5 trillion

Accounting for nearly a third of total healthcare spending, hospital care expenditures reached $1.5 trillion in 2023. CMS actuaries reported a 10.4% increase compared to 2022 when hospital care spending rose by just 3.2%. They said the rate of growth "was the fastest since 1990," which saw a rate of 10.8%.

Hospital care spending increased as a result of more spending by private insurers and Medicare for hospital care in 2023. Private health spending in this sector rose from 8.0% in 2022 to 13.0% in 2023. Medicare hospital spending grew from 1.5% in 2022 to 6.0% in 2023, largely due to more outpatient hospital use.

Hospital discharges also increased by 1.6% in 2023 after falling by 1.3% in 2022.

Meanwhile, hospital price growth remained relatively stable, according to the analysis. In 2023, growth was 2.7%.

Private health insurance: $1.5 trillion

CMS actuaries reported that private health insurance spending totaled $1.5 trillion in 2023. Spending increased by 11.5% compared to 2022 and represented a 30.0% share of total national healthcare spending in 2023.

As enrollment in Marketplace and employer-sponsored plans ballooned in 2023, the rate of private health insurance spending also grew faster than ever before. The analysis stated that the rate of growth was "not only faster than the 6.8 percent increase in 2022, but also was the highest growth rate since 1990." Enrollment in 2023 increased by 1.6%, or by 3.3 million people.

CMS actuaries also attributed the rapid growth in private health insurance spending to an "underlying" growth in goods and services expenditures and net insurance costs, including administrative costs and fees.

Medicare: $1.0 trillion

Medicare spending accounted for slightly over a fifth of total healthcare spending with $1.0 trillion in 2023. Spending on the federal program grew by 8.1% after increasing by 6.4% in 2022. CMS actuaries said the reason behind faster spending growth was greater fee-for-service spending that year, which increased by 1.7% in 2023 despite a 1.4% decline in 2022. CMS intends to convert more Medicare and Medicaid dollars to value-based care arrangements over the next five years.

Enrollment in Medicare also increased, growing by 2.1% in 2023. The rate is slightly faster than the previous year's increase of 1.9%. Fee-for-service enrollment, in particular, represented 52.0% of total enrollment, although the total number of Medicare beneficiaries in fee-for-service models declined. Medicare Advantage enrollment remained strong, at a growth rate of 7.9% in 2023.

Additionally, the analysis found that Medicare spending on goods and services saw accelerated growth in 2023. The rate was 8.6% compared to 5.4% in 2022. CMS actuaries pointed to greater hospital care and retail prescription drug utilization.

Physician and clinical services: $978.0 billion

Spending on physician and clinical services in 2023 reached $978.0 billion, accounting for about a fifth of total U.S. healthcare spending. Expenditures on the services increased by 7.4%, faster than the growth rate of 4.6% in 2022.

Similar to hospital spending, price growth for physician and clinical services remained low at 0.6%. The majority of the increase in spending in this sector came from nonprice factors. However, spending on independently billing laboratories also saw faster spending growth in 2023.

Across major healthcare payers, private insurers, Medicare and patients experienced the largest increase in physician and clinical services spending in 2023. The analysis found that private insurer spending increased by 9.4%, Medicare spending by 8.3%, and out-of-pocket spending by 7.0%.

Medicaid spending on the services decelerated in 2023, with a growth rate of 9.5% in 2023 versus 10.6% in 2022.

Medicaid: $871.7 billion

Accounting for 18.0% of total healthcare spending, Medicaid expenditures reached $871.1 billion in 2023. As with most major healthcare payers, Medicaid spending increased by 7.9% in 2023. However, the growth rate was slower than in previous years, when it was 9.7% in 2022 and 9.5% in 2023.

Medicaid enrollment also slowed in 2023 as states resumed Medicaid eligibility redeterminations after the end of pandemic-era coverage provisions. The analysis showed that enrollment growth slowed to 0.8% in 2023, a significant decline from 7.5% in 2022.

Provider rate and cost increases and more use of state-directed payments to providers through managed care organizations kept Medicaid spending high in 2023, CMS actuaries added. In addition, Medicaid spent more on other health, residential and personal care services in 2023, representing nearly a fifth of all Medicaid expenditures that year. Spending on this category includes home and community-based services. Medicare and Medicaid have focused on leveraging social determinants of health to reduce spending and improve outcomes for beneficiaries.

Retail prescription drugs: $449.7 billion

Spending on retail prescription drugs reached $449.7 billion in 2023, growing by 11.4% compared to the previous year. In total, this spending represented 9.0% of total healthcare spending.

Retail prescription drug spending experienced faster growth in 2023 compared to a rate of 7.8% in 2022. CMS actuaries attributed the recent acceleration in spending to "rapid growth in spending for drugs used to treat diabetes and obesity." Additionally, private insurers and Medicare saw faster spending growth on retail prescription drugs in 2023. With Medicare, spending grew partly as a result of benefit enhancements from the Inflation Reduction Act, such as reductions in Medicare Part D beneficiary cost-sharing for insulin.

Prices for the drugs also increased by 2.3% in 2023 despite a mere 0.5% increase in 2022 and four consecutive years of price declines from 2018 to 2021. Brand-name drugs saw faster price growth compared to generic drugs.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.