Aging Plays Limited Role in Health Care Cost Trends

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Data Bulletin No. 23 | September 2002 | Bradley C. Strunk, Paul B. Ginsburg

Contrary to popular belief, the aging of the baby boom generation was not a major driver of rapidly rising health care costs for Americans under age 65, according to HSC research. In 2001, population aging contributed an estimated 0.7 percentage points -- less than 10 percent of the total increase in per capita health care spending for the under-65 population. Since the trend in per capita spending determined the long-term trajectory of private health insurance premiums for working-age Americans, this finding had important implications for policy.

Explaining the Misconception

Health spending rises with age because older people tend to have greater medical needs. Average per capita spending therefore increases as the population ages. With the leading edge of the baby boom generation reaching its mid-50s, policymakers had increasingly focused on the link between aging and rising costs. However, the actual impact depended on two factors: how steeply spending per person increased with age, and how quickly the population was aging.

Annual per capita health spending increased by about $74 on average (in 2001 dollars) for each additional year of age between 18 and 64, though the rate accelerated after age 50 to about $152 per year. Meanwhile, the average age of Americans under 65 was rising by only about 0.13 years annually. These differences in spending by age were simply not large enough, and the population was not aging fast enough, to make aging a dominant cost driver for the under-65 population.

Aging's Past and Future Effect on Costs

Population aging was contributing more to health spending trends in the early 2000s than it had in the early 1990s. From 1990 to 1995, spending increases attributable to aging ranged from just 0.1 to 0.3 percent because most baby boomers had not yet reached 50. Projections through 2010 suggested that aging's role as a cost driver for the under-65 population would remain limited -- about 0.7 percent in 2005 and 0.6 percent in 2010.

Starting in 2011, as the first wave of an estimated 76 million baby boomers turned 65, financing of their care would begin shifting from the employer-based private insurance system to the publicly funded Medicare program. Medicare spending would increase significantly, though mostly because of the sheer number of people joining the program rather than higher spending per person. Financing this shift would severely strain the federal budget, forcing policymakers to consider difficult trade-offs such as reducing benefits, raising taxes, or tolerating larger deficits.

Policy Implications

Since the aging of the population was beyond anyone's control, employers and policymakers could take some comfort from the finding that aging was not a major cost driver for the under-65 population. Instead, they should focus on the more significant factors behind rising health spending: new medical technology, the retreat from tightly managed care, providers' growing ability to demand higher payment rates from health plans, and the hospital nursing shortage. The HSC aging index was constructed using data from the 1996 and 1997 Medical Expenditures Panel Survey and U.S. Census Bureau population estimates and projections.

Sources and Further Reading

Kaiser Family Foundation -- Employer Health Benefits Survey -- Annual data on employer-sponsored health insurance.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.