updated 2/23/2005 4:50:36 PM ET 2005-02-23T21:50:36

Within a decade, the government will be footing the bill for nearly half the nation’s medical costs, its share propelled higher by the new Medicare drug program, administration economists estimated Wednesday.

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At the same time, total health spending — both private and government — will take an ever-larger portion of America’s economic output, said the report from the Centers for Medicare and Medicaid Services.

The rise in federal payments raises “some really, really big issues” about a government budget in which other programs already are being squeezed out, said Urban Institute tax analyst Eugene Steuerle.

The projections were the result of an effort to measure the impact of last year’s Medicare law on overall health spending between 2004 and 2014.

Officials said that overall, the growth in health costs was expected to remain stable at around 7 percent per year over that period.

Privately paid portion to fall to 59 percent
But the portion borne by the government will rise due to the Medicare drug benefit that starts next year.

This year, 76 percent of all drug spending — a projected $223.5 billion — is expected to come from private health insurance and out-of-pocket co-payments.

That privately paid portion will fall to 59 percent next year, when the new Medicare benefit starts and there is a shift to Medicare from private payers and from Medicaid, officials said.

“In part because of this funding shift, our projection calls for public funding of health care to exceed 49 percent by” 2014, the report said.

It called that “a record share that could have important implications for the budget as a whole.”

By 2014, overall medical payments are projected at about $3.6 trillion, with the government footing 1.8 trillion, or 49.4 percent, and private funding covering just over 50 percent, it said.

The federal share has been rising for decades. In 1965, the government was covering roughly 25 percent of health costs and private parties 75 percent, according to the report. Last year the government paid 45.6 percent of an estimated $1.8 trillion in medical bills.

Health care costs to grow faster than GDP
Eventually, the two sides will reverse roles, with the government paying more than half, said Richard Foster, chief actuary for the Centers for Medicare and Medicaid Services.

The report also said that over the decade health care spending is expected to continue growing faster than the nation’s gross domestic product. Therefore, it will account for 18.7 percent of GDP in 2014 compared with 15.3 percent last year.

Under the Medicare changes, participants will pay monthly premiums that are expected to average $35 in 2006 and the first $250 in drug costs. Medicare will pick up 75 percent of the next $2,000 in prescription expenses. After that, a gap is built into coverage during which participants are responsible for the entire drug bills until costs top $5,100, after which the government pays 95 percent.

When Congress narrowly approved the drug legislation in 2003, the administration told wavering lawmakers that the program would cost $400 billion, including expected savings. The White House revised the estimate to $534 billion two months later, after the law was enacted.

Then this month it said the figure was more like $720 billion.

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