Projecting Long-Range Aggregate Health Expenditures:

OACT, CBO, and SOA Approaches

Presentation by:Todd Caldis, Ph.D., J.D.

Senior EconomistNational Health Statistics Group, CMS\OACT

September 18, 2009

The Middle Atlantic Actuarial Club

Introduction

• The long-range projection challenge

• Examine and compare the three principal approaches in use for projecting long-range health expenditures

• General observations (brief)

• Questions and discussion

The Projection Task

• CMS, Office of the Actuary (OACT)

• Congressional Budget Office (CBO)

• Society of Actuaries (SOA)

The Projection Problem

• Almost uninterrupted trend of health sector growth faster than the growth of our overall economy

• Growth can’t go on forever---an economy devoted only to health care can’t exist

Health Sector Growth

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

NHE Share

of GDP(%)

Year

Chart 1 - National Health Expenditures (NHE) as a Percentageof Gross Domestic Product (GDP)

1960-2007

Source: Centers for Medicare & Medicaid Services, Office of the Actuary

International Comparisons

AustraliaAustria

BelgiumCanada

Czech Republic

Denmark

Finland

FranceGermany

GreeceHungary

Iceland

Ireland

ItalyJapan

KoreaLuxembourg

Mexico

Netherlands

New ZealandNorway

Poland

Portugal

Slovak Republic

SpainSweden

Switzerland

Turkey

United Kingdom

United States

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Share of

GDP (%)

Chart 2 - Total Expenditures on Health as a Percentage Share of GDP,OECD Countries, 2006

Source: OECD Health Data 2008.Note: For the United States the 2006 data reported here do not match the 2006 data point for the United States in Chart 1 since the OECD uses a slightly different definition of "total expenditures on health" than that used in the National Health Expenditure Accounts.

Excess Cost Growth TrendsTable 1 - Average excess cost growth rates, selected time periods 1975-2007

NHE (rounded) GDP (rounded)

Periods beginning with 1975:

through 1980 (5 years) 4.5% 2.7% 1.8%through 1985 (10 years) 4.6% 2.5% 2.2%through 1990 (15 years) 4.9% 2.4% 2.5%through 1995 (20 years) 4.5% 2.1% 2.4%through 2000 (25 years) 4.2% 2.3% 1.9%through 2007 (32 years) 4.0% 2.1% 1.9%

Periods beginning with 1980:

through 1985 (5 years) 4.8% 2.3% 2.5%through 1990 (10 years) 5.1% 2.3% 2.9%through 1995 (15 years) 4.5% 1.9% 2.6%through 2000 (20 years) 4.1% 2.2% 1.9%through 2007 (27 years) 3.9% 2.0% 1.9%

Periods beginning with 1985:

through 1990 (5 years) 5.5% 2.3% 3.3%through 1995 (10 years) 4.4% 1.8% 2.6%through 2000 (15 years) 3.9% 2.2% 1.7%through 2007 (22 years) 3.7% 1.9% 1.8%

Periods beginning with 1990:

through 1995 (5 years) 3.3% 1.3% 2.0%through 2000 (10 years) 3.1% 2.2% 0.9%through 2007 (17 years) 3.2% 1.8% 1.4%

Periods beginning with 1995:

through 2000 (5 years) 2.9% 3.1% -0.2%through 2007 (12 years) 3.1% 2.1% 1.1%

Periods beginning with 2000:

through 2007 (7 years) 3.3% 1.3% 2.0%Note: NHE rates are adjusted for age-gender effects.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary.

Time period Average constant-dollar, per capita growth Average Excess

Cost Growth Rate

The Projection Challenge

• Health sector can’t grow faster than the economy forever---so it won’t.– Cannot project off of historic growth trends

alone in the long-run

• But when, how, and at what rate will excess cost growth slow down?– What evidence to rely on

Method #1: OACT Excess Cost Growth Model

• The first excess cost growth projection model

• Result of an evolution that started in the late 1990s

• Uses a core assumption about the average rate of excess cost growth for the last 51 years of the 75-year horizon

• More complicated modeling apparatus brought in to refine the assumption into its finished form

Projection from a Current Law Perspective

• Idea of a policy-neutral baseline, the state of the world if specified existing policies remained unchanged.

• A perspective that characterizes much of OACT’s work

• For long-term projections the state of the world if benefits now promised are maintained– Assumes that revenue to pay benefits would

and could be found

Basic Formulas: Definition of Excess Cost Growth

• Difference of growth factors(algebraically equivalent to a difference of rates):

• Health expenditures and Age-Gender are per enrollee; GDP is per capita.

Basic Formulas: The Excess Cost Ratio

• The XRatio can be thought of an excess cost growth factor.

A Projection Formula

• Can implement with aggregate expenditures in the formula if also include a population factor in the equation:

The Core Excess Growth Assumption: GDP+1

• Assumption that average per enrollee, age-gender adjusted rate of health expenditure growth will exceed per capita rate of GDP growth by 1% for the years 25 through 75 of the projection horizon.– If GDP growth is 5% and age-gender adjusted

health expenditure growth will be 6%, a percentage point more

• Can be implemented with either nominal or real GDP

Implementing the Method for a 75 Year Horizon

• Years 1 -10 determined by OACT short-run projections.

• Years 11 – 25 based on straight-line transition from excess cost ratios for year 10 to the consolidated excess cost ratios for year 25.

• Years 25 – 75 projections based upon excess cost ratios generated from the CMS Computable General Equilibrium (CGE) Model.

Generating Long-Range Excess Cost Ratios (Years 25 – 75)

• OACT CGE Model– A Ramsey-type model optimizing for a

representative agent– Incorporates assumptions about technological

change and costs effects for the health sector

• CGE solved for a time series of excess cost ratios whose resulting Part A actuarial balance is financially equivalent to the cumulative 75 year balance under a linear GDP + 1 excess cost growth rate

History of the GDP + 1 Excess Cost Growth Assumption

• Until 2001 projections in Trustees Reports implicitly based upon a “GDP + 0” assumption of no excess cost growth for projection year 26 forward.

• Pure “GDP + 1” implemented in 2001 based upon recommendations of the 2000 Technical Review Panel for projection year 26 forward.

• “GDP + 1” affirmed as “within the range of reasonable assumptions” by 2004 Technical Review Panel.

• Refined GDP +1 with OACT CGE “smoothing” implemented starting with 2006 Medicare Trustees Report.

Thinking About “GDP + 1”

• Based upon expert consensus. • Reflects expectation of a substantial slowdown

in historic rates of excess cost growth.• Reflects belief that technological change will

remain an important driver of excess cost growth for most of the 75 year projection horizon.

• An understandable and discussable core assumption

The Idea of “Natural Brakes”

• Rationale that reconciles idea of a spending slowdown with current law

– Cost sharing provisions in current law Medicare

– Diffusion of cost-saving practice patterns (Spillover)

Method #2: CBO’s Excess Cost Growth Model

• First long-term projection using this method appeared in November, 2007 in “The Long-Term Outlook for Health Care Spending”

• The same framework was employed with modified assumptions for CBO’s most recent long-term health expenditure projections released in June, 2009

• Like OACT, CBO projects from a current law perspective

CBO’s Disaggregated View of Excess Cost Growth

1976 1980 1984 1988 1992 1996 2000 2004

-10

-5

0

5

10

15

20

Total Medicare

Medicaid

Other

Source: Congressional Budget Office, The Long-Term Outlook for Health Care Spending, November 2007.

CBO’s Basic Projection Formula

Source: The Long-Term Outlook for Health Care Spending (CBO: November, 2007)

CBO’s Excess Cost Growth: The Definition of xt

Source: The Long-Term Outlook for Health Care Spending (CBO: November, 2007)

Relation between CBO and OACT Excess Cost Growth

• A conceptual connection useful for comparing CBO and OACT approaches

• In practice OACT has a single series of Xratios applicable to all parts of the US health sector; CBO has three series related to each other, but distinct, each series being applicable to a different part of the US health sector

Other OACT/CBO Similarity

CBO’s Disaggregated Excess Cost Growth Projection Method

• Projects excess cost growth for the US health sector partitioned into Medicare, Medicaid, and Non-Medicare, Non-Medicaid

• For each part of the health sector implements different initial rate of excess cost growth-measure of historic average

• Beginning in the 12th year of the 75-year projection period each part’s rate of excess cost growth begins decelerating

“Identification” of CBO’s Projection

• Assumption about interconnection across the three parts of the health sector of the rate of excess cost growth deceleration– In 2007 Medicare and Medicaid assumed at 25% and

75% of the rate of deceleration in Non-Medicare, Non-Medicaid

– In 2009 Medicare assumed to decelerate at 1/3 the rate of NMNM; Medicaid at the same rate as NMNM

• Choose an NMNM deceleration rate such that real per capita Non-Health personal consumption expenditure is always non-negative (No recomputation in 2009)

CBO’s Deceleration Factors

• For 2007 projection, the excess cost growth rate decelerated at 4.6% per year for NMNM, 3.45% per year for Medicaid, and 1.15%

• 2009 projection assumed that NMNM would continue to decelerate at approximately the same rate as in the 2007 projection, 4.5% per year and changed the assumed connection with deceleration elsewhere

– Medicaid at same deceleration rate as NMNM, 4.5%

– Medicare decelerating at one-third the rate of NMNM, 1.5% per year.

• Remember---deceleration refers to deceleration of the rate of excess cost growth unique to each of the three parts of the health sector

Other Aspects of CBO Long-Range Health Expenditure Projection

• For the first 10 years uses short-range projections where available (e.g. Medicare); for other parts of health sector otherwise assumes that historic rate of ECG prevails

• For year 11 of the projection period each part of the health sector assumed to be at its historic average rate of ECG

– 2007: 2.4% (Care), 2.2% (Caid), 2.0% (NMNM)– 2009: 2.3% (Care), 1.9% (Caid), 1.8% (NMNM)

• Deceleration of ECG in each part of health sector starting in year 12.• NMNM nominally includes Medicare-related and Medicaid-related items

– E.g. State Medicaid share and Medicare OOP– CBO makes assumptions to pull such items out of NMNM, compute

NMNM growth without them, grow the removed items at the same rates as Medicare or Medicaid, and then recombines the removed items with the rest of NMNM

CBO’s Theory of ECG Slowdown

• Assumes no change in federal policy, i.e., current law

• Private sector flexibility to respond to cost pressures

• State laws may change– Medicaid program therefore more able to

respond to cost pressure than Medicare but less able than private sector

• Assumes spillover effects in practice norms and pricing

Comparison of OACT and CBO Methods

• Results are driven by substantively different assumptions about rates of excess cost growth

• Reflect different views of how current law would play out into the future

• Mechanical implementations are different and raise issues of method unique to each model

Comparison of ECG Assumptions

Source: Centers for Medicare and Medicaid Services, Office of the Actuary

Effect of Excess Rate Assumptions on Projections

Method #3: Getzen-Society of Actuaries (SOA)

• Released in 2007 under auspices of the Society of Actuaries

• Constructed by Professor Thomas Getzen under contract with SOA and in close consultation with a working group of actuaries

• Intended as a tool for evaluating retirement health benefit plans; base scenario with allowance user discretion in choice of inputs

• Allows fast excess cost growth to continue until NHE attains a prescribed share of GDP or a specified limit year is reached

Required Inputs

• Per capita rate of real income growth (Income%)• Income elasticity, rate at which real income growth

converts into increased demand for health care (IncElas: A constant)

• Per capita rate at which technology and other factors contribute to increased demand for health care (Tech%: A percentage independent of income growth)

• Baseline Health Sector Share of GDP in 2011(ShareBase

• Average CPI (appears to affect nominal but not real action in the model)

Significance of Inputs: Fixed Annual GDP Share Increment

• Annual increment is fixed annual increment by which health sector share grows if no limits are encountered

• If ShareBase = 17.5% would reach 42.1% in 2083 and 100% of GDP in @2250.

Growth Limiting Options

• Resistance Share: A user-specified health sector share of GDP (25% in baseline model)– Beyond the resistance point the annual increment

is gradually reduced.– Asymtotically health sector share can never grow

to more than twice the resistance share

• Limit Year: User-designated year beyond which the annual increment is rapidly phased to zero.

Other Options

• Change parameter values in 2020-2030 and 2030+

• Playing with per person baseline medical costs

SOA Outputs

• Health sector share

• Per capita income

• Per capita medical costs

• Percentage increases

What’s distinctive about SOA Model?

• Annual Increment forces user to think about substantive sources of excess cost growth

• Base model (used without resistance share and limit year options) builds in gradual deceleration of excess cost growth

• Resistance Share and Limit Year options permit consideration of sudden-end scenarios

Comparison of Projection Results

Comparison of Long Range Projections of National Health Expenditures

2018-2082

OACT

CBO

SOA-Getzen

0

10

20

30

40

50

60

2018 2028 2038 2048 2058 2068 2078

Year

Percentage

Share

of GDP

OACT CBO SOA-Getzen

Source: Centers for Medicare and Medicaid Services, Office of the Actuary

Similarities Among All Methods

• Each based on assumptions about excess cost growth.• Each envisions a slowdown in excess cost growth.

– OACT envisions natural brakes smoothly decelerating to zero ECG in 75 years

– CBO envisions different parts of the health sector decelerating at different rates with a non-steady state at the end of 75 years

– SOA-Getzen in its unconstrained version envisions smooth deceleration of health sector growth with no steady state reached at the end of 75 years.

• Each accepts the proposition that the health sector will continue to grow despite a slowing of ECG rates

• In fact, each method projects a health sector share between 40 and 50 percent at the end of 75 years (SOA-Getzen in its unconstrained version)

• Each of these models documents the implications of assumed trend patterns better than they explain them

Research Issues Common to All Projection Methods

• All need to work on strengthening the evidence supporting key assumptions about slowing ECG– OACT working with a simple insurance cost-sharing

model, also has a modest spillover project in progress, and is in contact with an NIA-funded effort to incorporate features of insurance cost-sharing provisions into the Urban Institute’s microsim

– CBO may be working long-term to incorporate insurance cost-sharing features into its CBOLT microsim

– Not aware of research through SOA; maybe someone here can comment

Constraints on Development of These Methods

• OACT and CBO must produce current law projections– CL necessarily involves a scenario in which existing

program is sustained into the indefinite future– In commentary both OACT and CBO acknowledge

that the actual sustainability of their long-term scenarios is open to serious question

– In some circumstances current law scenarios are declared unsustainable.

Other Development Constraints

• Professional standards

• Some stability in methods desirable; erratic swings in LT projections due solely to methodolgical brainstorms would send a confusing message

• Tension between complexity and transparency

Usefulness of These Projection Methods

• Credible warnings about a long-term systemic solvency crisis that our society faces

• Would be a bonus if these methods provided insight toward solving the crisis– Bonus but not the fundamental mission

• Explanatory limits of these methods not an excuse for complacency

References

• Medicare Trustees Reports– http://www.cms.hhs.gov/ReportsTrustFunds/

– Has link to an official OACT memorandum about projection methodology (by Caldis)

• Congressional Budget Office– The Long-Term Outlook for Health Spending

(November, 2007)– The Long-Term Budget Outlook (June, 2007)

• Society of Actuaries– http://library.soa.org/research/health/research-hlthcare-trends.aspx

Contact Information

Todd Caldis

(410) 786-1217

todd.caldis@cms.hhs.gov