U.S. taxpayers will directly shoulder half of the nation’s health care costs by the end of the next decade, according to federal cost estimates released Wednesday.

The figures show that spending on Medicare and Medicaid will grow at roughly 7 percent to 8 percent per year until 2014, when the programs are expected to cover 49 percent of all U.S. health costs. After that, publicly funded programs will for the first time surpass private insurance as the nation’s primary backer of health insurance, the estimates show.

The report also projects that by 2014 health care spending will take up nearly 19 percent of the gross domestic product, up from 15.3 percent in 2003. The trends have analysts continuing to question whether the nation can afford to pay for the health care of the retiring baby boom generation without a major reordering of its budget priorities.

Richard Foster, the chief actuary at the federal Centers for Medicare Services, warns that just as the nation will steer more of its economic resources toward health care, consumers too will be forced to spend a growing share of their income for medical services. The trends point to “a long-term financial imbalance” in U.S. health care, he says.

“It’s not that hard to speculate beyond 2014 because it has demographics written all over it,” Foster says.

Medicare’s Drug Plan: Why Did Cost Estimate Rise?

Medicare is set to undergo a major expansion in 2006 when it begins paying part of seniors’ prescription drug costs. The program is expected to pay $70 billion for drugs for 39 million beneficiaries next year and $720 billion by 2014, according to White House budget documents released in early February.

But the prescription benefit is expected to have little long-term impact on consumers’ out-of-pocket spending for health care. Out-of-pocket spending for prescriptions is expected to dip in 2006, but will then continue rising at an estimated 6 to 7 percent per year until 2014, the report estimates.

Retail drug prices are expected to drop 15 percent for Medicare seniors in 2006, though most of the savings for the health system as a whole will be wiped out by higher utilization of prescriptions, Foster says.

The estimate was far beyond the $534 billion prediction put forward by administration actuaries last year and nearly double the $400 billion cost pegged for the prescription benefit when Congress narrowly voted for it in late 2003.

Administration officials stressed that most of the expanded cost estimate owed to an accounting shift that looked at 2013 and 2014, when seniors would spend the most ever on prescription drugs.

Congress, President Clash

The high cost led to calls on Capitol Hill by some conservative lawmakers to scale back the prescription drug benefit to its original $400 billion price tag. Such a move would almost certainly require a drastic cut in seniors’ expected drug benefits, an idea that two weeks ago President Bush threatened to veto.

Former Medicare trustee Marilyn Moon, PhD, warned Wednesday that Social Security payments cannot keep pace with projected rises in seniors’ out-of-pocket Medicare costs as baby boomers continue to retire. The average 85-year-old beneficiary spent 18 percent of his Social Security income on Medicare costs in 2000, which did not include the cost of prescription drug coverage. Under current projections the figure is expected to more than quadruple to 76 percent of Social Security income by 2040.

Moon warns that proposals to allow for the importation of cheaper drugs from Canada or to give the government the authority to negotiate lower prices from drug manufacturers are likely to have little effect on the health system’s long-term spending outlook.

“As a society we need to look at these costs and how much we are willing to spend,” says Moon, now vice president of the American Institutes for Research. “We are going to have to have a serious discussion about this.”

By Todd Zwillich, reviewed by Brunilda Nazario, MD

SOURCES: U.S. Health Spending Projections for 2004-2017, National Health Statistics Group, Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services. Richard Foster, chief actuary, Centers for Medicare and Medicaid Services. Marilyn Moon, PhD, vice president, American Institutes for Research.