These projections are produced annually by the Office of the Actuary at the Health Care Financing Administration. They are based on historical National Health Expenditure (NHE) data through 1999, and a model framework that incorporates actuarial, econometric and judgmental factors. Projections of private health spending and total health spending are generated within an econometric model incorporating the historical NHE experience, and assumptions consistent with those used for Medicare and Medicaid projections. Estimates of Medicare and Medicaid spending are projected separately based on actuarial projections from the 2000 Trustees Reports. Demographic and macroeconomic assumptions were drawn from the intermediate scenario in the 2000 Annual Reports of the Old-Age, Survivors, and Disability Insurance (OASDI) and Medicare Boards of Trustees to Congress. Macroeconomic data and Medicare and Medicaid spending data available as of September of 2000 were included. Projected growth in Medicare spending reflects the assumption that there will be no alterations to current law (this assumption is required by law for the Medicare Trustees Report). Projections of Medicaid spending are prepared using actuarial assumptions consistent with those used to project Medicare.

National health expenditures are projected to total $2.6 trillion and reach 15.9 percent of Gross Domestic Product (GDP) by 2010, after having declined from 13.4 percent in 1993 to 13.0 percent in 1999. In 2008, health spending is projected to total $2.3 trillion or 15.5 percent of GDP, compared to our previous projection exercise in 1999, which forecast expenditures for 2008 of $2.2 trillion, or 16.2 percent of GDP. Since the 1999 projection, historical GDP estimates were revised upwards. In this projection, health spending as a percent of GDP increases over the projection period due to faster health spending growth and slightly slower GDP growth, relative to the most recent historical period.

The projected growth in health spending over the next decade is fueled in part by rapid increases in spending for prescription drugs. The conditions that propelled prescription drugs expenditures since 1995 are projected to persist over the next decade, although the impact of these conditions in the latter period of the projection is assumed to be smaller than in the initial period. These conditions include an increasing number of health plans with low-cost co-pays for drug coverage, direct-to-consumer advertising, and newer, better therapies requiring high-cost branded products. Other factors contributing to the projected faster health spending growth include rising provider costs, insurers inability to negotiate increasing price discounts as obtained in the recent historical periods, and greater income growth.

Health spending growth is projected to accelerate to an annual rate of 8.3 percent in 2000 and 8.6 percent in 2001, and then grow at a more moderate average annual rate of 7.1 percent through 2010. The out-year projections reflect a move back toward more restrictive health plans as economic growth slows, private health insurance premiums rise, and employers attempt to control costs. Public spending is projected to decline as a share of total health spending over the next decade, primarily caused by faster private health spending growth than in the most recent historical period.

In interpreting these projections, it is important to recognize the uncertainty inherent in the projection process. These estimates must be regarded as an indication of possible trends, conditional on our assumptions regarding future macroeconomic conditions, as well as assumptions regarding the nature and impact of future institutional change in the health sector.