The Health Care Cost Curve Is Bending up Again

The actuaries and economists at the Center for Medicare and Medicaid Services (CMS) recently released their annual National Health Expenditure Accounts (NHEA) for 2024. The NHEA is a matrix that records, in detail, US health expenditures in aggregate and by type, sources of funds, and sponsors of spending. In 2024, health care spending, at $15,474 per person, grew 7.2 percent, outpacing economic growth of 5.3 percent, so that NHE as a percent of GDP rose from 17.7 percent in 2023 to 18.0 percent. Excluding the unusual years of the COVID pandemic, this health share represents a historical high and a break from a period of quiescence in the growth of health spending since 2016. As shown in Figure 1, since 1960 the health share has steadily increased, and we appear to be returning to that pattern.

Figure 1

National Health Expenditures as a Percent of Gross Domestic Product, 1960–2024

Indeed, personal health care spending, which excludes sector investment and administration, grew by 8.9 percent from 2023 to 2024, the highest rate since 1991-92. Given that health prices increased only by 2.5 percent and the population by 1.0 percent in 2024, the large increase in health spending can reasonably be interpreted as reflecting increased demand for care and changes in the mix of health care goods and services toward more expensive care. This boost in demand has likely been caused by several recent policy inducements from the federal government to support increased health care spending, as described briefly below.

Affordable Care Act marketplace enrollment jumped to 21.1 million in 2024, up from 16.2 million in 2023 and 9.8 million in 2019, driven by the enhanced premium tax credit extension and the special enrollment period that allowed those who lost Medicaid coverage during "unwinding" from pandemic-era coverage to enroll in marketplace plans. There is some evidence that some of this increase in enrollment came from fraud. Federal government-sponsored health care spending increased 5.5 percent in 2024, up from 3.8 percent growth in 2023. This increase was caused by rapid growth in marketplace tax credits and subsidies, at 34.9 percent, and strong growth in Medicare expenditures, at9.6 percent, owing to provisions legislated in 2022 that reduced beneficiary cost sharing and shifted more financial responsibility to the federal government, especially for insulin and vaccines, and through the elimination of coinsurance in the catastrophic coverage phase of benefits and the expansion of eligibility for Part D (drug benefit) low-income subsidies. State and local government spending increased by 12.1 percent as these governments picked up the slack in federal Medicaid spending occasioned by the expiration of the COVID-era enhancements of the federal medical assistance percentage for Medicaid. Demand was also boosted by an increase in coverage by employer-sponsored insurance of 3.0 million. By contrast, growth in out-of-pocket spending on deductibles and copays slowed from 6.8 percent in 2023 to 5.9 percent 2024; this type of spending may be thought of as somewhat of a break on health care demand.

Health care spending increased rapidly across many types of care, including hospitals (8.3 percent), professional services, mainly physicians (8.9 percent), various forms of personal and residential care, including home health care and nursing homes, related to population aging (8.8 percent), and prescription drugs (7.9 percent), partially owing to increased demand for brand-name antidiabetic drugs.

Medicare spending, accounting for 21 percent of NHE, increased by 7.8 percent in 2024. Medicare Advantage plan spending increased 9.0 percent, down from 16.1 percent in 2023, as policy lowered benchmark payment rates and enrollment continued to rise. Medicare traditional fee-for-service spending picked up to 6.4 percent growth from 2.0 percent in 2023, even as enrollment there continued to decline, falling by 1.4 percent. Now fully half of all Medicare beneficiaries are enrolled in Advantage plans. Fee-for-service Medicare spending accelerated for hospital care and physician services, including physician-administered drugs, notably increased spending for skin substitutes in wound care.

Medicaid spending, accounting for 18 percent of NHE, increased by 6.6 percent. Enrollment declined by 8.6 percent to 84.3 million as states resumed eligibility redeterminations, and per enrollee spending surged by 16.6 percent, partly owing to rising provider payment rates and payments to managed care organizations. Medicaid spending on long-term care rose 9.5 percent.

Although overall price increases in the health care sector at 2.5 percent in 2024 matched those of the GDP deflator, there was acceleration in prices for hospital care, 3.4 percent, up from 2.7 percent in 2023 and the fastest rate since 2007, and for physician services, at 1.8 percent, up from 0.6 percent in 2023. Under the law, CMS instituted a 2.8 percent cut to physician payment rates in 2025, but the recently enacted One Big Beautiful Bill Act includes a 2.5 percent increase for 2026, which, when combined with some other CMS regulatory adjustments, would hike Medicare physician payment rates by 3.8 percent in 2026.

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