Government Is Likely to Pay 49%
Of All U.S. Health Costs by 2014

Growth in health-care spending will continue to slow, but federal, state and local governments will be picking up nearly half of all U.S. health costs within a decade, a shift that largely reflects Medicare's new prescription-drug coverage, federal analysts forecast.

Government will pay 49% of health costs by 2014, up from 46% currently, according to the agency that runs Medicare, the federal health program for the elderly and disabled. The government's portion has been rising steadily, from 43% in 1980 and 38% in 1970.

"The public sector will feel more deeply the financial burden associated with supplying health-care benefits to Medicare and Medicaid enrollees," the federal analysts wrote in an article published by the journal Health Affairs.

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The data underscore the strain on the nation's health-care system at a time when government officials, especially Republicans, are eager to rein in spending on public programs like Medicare and Medicaid, the state-federal health program for the poor. Meanwhile, employers are complaining about the high cost of providing health care to workers, and individuals are paying a growing share of their own medical costs without seeing a comparable increase in their wages.

If nothing changes, "we as a society collectively might not be able to get the health care we really want," said Richard Foster, the chief actuary for the Centers for Medicare & Medicaid Services.

When the Medicare drug benefit begins in 2006, an estimated $67 billion in drug spending will shift to Medicare from other payers, such as private insurers and Medicaid, which now provides medications to some poor beneficiaries of Medicare. States will pay a portion of the drug costs incurred by beneficiaries who are eligible for both programs, and the federal government will pick up the tab as more Medicare beneficiaries who have been paying out-of-pocket for their medicines sign up for the new federal benefit.

Overall, the Medicare study predicts that the growth in health-care spending will continue to slow. It projected that last year's growth in health-care spending -- final numbers aren't yet available -- will increase 7.5%, down from 7.7% in 2003. By 2014 the increase is projected to be 6.7%, a much slower clip than the 9.3% peak seen between 2001 and 2002. Still, health-care spending will outpace growth in the overall economy, and by 2014, health care's share of gross domestic product is projected to be nearly 19%, up from 15% in 2003.

On the private side, health-care spending is projected to slow to 7.4% between 2003 and 2004 from a peak of 9% between 2001 and 2002. The government analysts attribute the slowdown in part to a "quiet reimposition" of managed-care tools that tamp down use of medical care, such as increased cost-sharing for patients. Private health-insurance premium growth is also expected to slow, to 7.7% in 2004 from 9.9% in 2003.

However, the strain remains for private health spending, especially in the employer-based system that covers most insured Americans. The government projects that premium growth will outpace disposable personal-income growth by 1.4 percentage points from 2004 to 2014.

The Medicare analysts emphasized that their numbers aren't certain, in part because it's difficult to predict the impact of the new Medicare drug coverage. In addition, the data are based on current law, not possible future policy changes.

The analysts say the drug benefit will cause an initial jump in prescription-drug use by Medicare beneficiaries and a minor rise in spending on medications. But the impact will be largely offset by lower drug prices, they said. The analysis assumes that savings on drugs will be 15% off retail prices when the drug benefit starts and will grow to 25% off retail over time. In 2006, the first year of the Medicare drug benefit, total spending on prescriptions is expected to grow nearly 12%. Drug-price growth, including the Medicare drug benefit, will account for 2.4 percentage points of that surge, the analysis said.

Spending on drugs is expected to represent the largest share of total out-of-pocket spending -- 24% in 2004. That means the public's attention on drug prices will likely continue. Marilyn Moon, an economist and Medicare expert at the American Institutes for Research, said that Medicare beneficiaries will see a growing share of their Social Security checks going toward Medicare premiums and deductibles. "In the long run the only way to save this program ... is to put a crowbar in our wallets and pay for it," she said.

Already, members of Congress are proposing legislation that would legalize importation of prescription drugs from other countries and give the government power to negotiate with drug makers for lower prices in Medicare.

But the problems with the health system appear bigger than those proposals. Government programs like Medicaid have been a refuge for people losing coverage from their employers. Baby boomers are going to begin entering Medicare within the next decade, and an aging population is expected to cause a rise in Medicaid's nursing-home costs. But it's unclear how the nation will proceed. "The spending spree is over, and we're going to have to face up to the cost of government one way or another," said Eugene Steuerle, a tax-policy expert at the Urban Institute.

Write to Sarah Lueck at sarah.lueck@wsj.com⁵