Medicaid expansion, exchanges push healthcare spending past Social Security

(Story updated at 6:15 p.m. Eastern)

In 2015, the U.S. federal government spent more on healthcare than on Social Security for the first time.

The Affordable Care Act's expansion of Medicaid and the growing availability of subsidies for exchange plans are driving much of the higher spending.

Enrollment in the ACA's insurance exchanges will hover around 13 million in 2016, the Congressional Budget Office said in an expanded economic report Monday, down from its previous estimate of 21 million but still above HHS' most optimistic projection.

But the exchanges represent just a small slice of federal healthcare spending. Medicare and Medicaid will eat more into the federal budget over the next decade, yet per-person costs will remain constant with historical norms.

The CBO also noted that medical-device companies and health insurers could save billions of dollars over the next decade if the temporary moratoriums on certain taxes are made permanent—underscoring a potentially huge return on those groups' lobbying investments.

The nonpartisan budget analysis group, led by Republican-appointed Keith Hall, released a teaser version of its January budget outlook last week. It found that spending on federal healthcare programs—including Medicare, Medicaid, the ACA and the Children's Health Insurance Program—will increase by 11% this year and will be a major reason why mandatory federal expenses will rise over the next decade.

Last year, net federal spending on healthcare totaled $936 billion compared with $866 billion for Social Security, CBO's numbers crunchers said. The amount spent on healthcare is only expected to increase in the coming years due largely to Medicaid and the ACA's fledgling marketplaces.

Federal spending on Medicaid, the state-federal health insurance program for the poor, will grow by $31 billion in 2016, equaling an 8.8% year-over-year increase, the CBO projected. Next year's anticipated growth rate is actually slower than in 2014 and 2015, the first two years of Medicaid expansion. Thirty-one states and the District of Columbia have expanded Medicaid eligibility to more low-income adults, but many Republican-led states have refused to do so citing political opposition to the ACA and cost concerns.

Meanwhile, premium and cost-sharing subsidies, as well as other exchange-related programs like risk adjustment and reinsurance, will cost the federal government $18 billion more this year, totaling $56 billion. Approximately 84% of exchange enrollees receive premium subsidies, available to those earning 100% to 400% of the federal poverty level. More than half get cost-sharing reductions, which apply to those who make between 100% and 250% of the poverty level and are enrolled in a silver-level plan.

“The higher spending reflects an anticipated increase in the number of people expected to receive subsidies for coverage purchased through exchanges,” CBO analysts wrote. The group did not offer exchange enrollment projections for 2017 and beyond, saying it will wait until March to release those details.

Medicare continues to consume the largest portion of the federal government's healthcare spending. There were 55 million people enrolled in Medicare in 2015, and that number will climb to 75 million by 2026 thanks to the aging of the baby boomers. The CBO said Medicare's hospital trust fund, which totaled $195 billion at the end of 2015, will be depleted by 2026, compared with the Medicare trustees' most recent estimate of 2030.

While higher Medicare enrollment is driving up overall spending, the program is still projected to keep costs in check. The average growth in annual per-beneficiary spending is estimated to be 1.6% between 2016 and 2026, compared with a 4% annual rate from 1985 to 2007. The lower per-capita spending growth is partly driven by new Medicare beneficiaries who “tend to use fewer healthcare services,” according to the CBO report.

The report may also reveal why medical-device companies and health insurers have spent millions of dollars lobbying Capitol Hill to lift the ACA's industry taxes. The recent budget deal temporarily suspended the medical-device tax for 2016 and 2017 and postponed the health insurance provider fee for 2017. The so-called Cadillac tax on high-cost employer plans, which was supposed to go into effect in 2018, also was pushed back two years.

If those taxes are repealed permanently—thereby eliminating cost controls and major sources of revenue that were supposed to help pay for President Barack Obama's healthcare law—the federal government would lose out on $256 billion in revenue from 2018 to 2026, the CBO said.