Accuracy and Range of Actuarial Projections of Health Care Costs

Abstract

The Office of the Actuary is mandated to provide projections of future medical spending for use by the U.S. Medicare and Medicaid programs, and which are widely used by private firms and government budget officials to create forecasts of health spending and retiree health benefits. Although these projections have been made publicly available since 1986, they have not yet been subject to a systemic evaluation by an external reviewer. This paper develops a method for assessment of both short and long-run accuracy, and applies it to all 17 sets of projections made public over the last 25 years. It appears that the more recent set of projections (1998-2010) incorporating lagged macroeconomic effects are more accurate than the older (1986-1995) projections that relied more heavily on demographic cost of illness trends. The average error of the forecasts averages about 0.5%-1% per year, whether assessed over a span of one, two or ten years. Projecting “excess” growth in health spending (the rise in the share of wages or GDP) tends to be more accurate than forecasting nominal or real spending per capita.