Health care cost inflation: planning for the guest who never leaves

By Tom, CPA · Updated October 25, 2026

TL;DR: CMS reports U.S. health spending grew 7.2% in 2024 to $5.3 trillion, 18.0% of GDP, and projects average growth of 5.4% a year through 2034, faster than the economy. Early retirees should model health costs growing faster than general inflation and add age-related increases.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Health care inflation: the guest who never leaves the party. Most retirement plans assume one inflation rate for everything. Health care rarely cooperates. National spending has tended to grow faster than the overall economy, and individual retirees face a second effect on top: premiums and use rise with age.

This guide walks through official data, how to model health costs in a FIRE plan, how ACA age rating works, stress tests, and a worked example.

CPA Warning Label: General inflation is a polite guest. Health care inflation brings friends and stays for decades.

Historical medical inflation (sourced)

From CMS's National Health Expenditure data:

• U.S. health spending grew 7.2% in 2024, reaching $5.3 trillion, or $15,474 per person.
• Health spending was 18.0% of GDP in 2024.
• CMS projects national health spending to grow an average of 5.4% a year from 2025 through 2034, faster than average GDP growth of 4.1%, pushing health's share of GDP to 20.6% by 2034.
• Medicare spending is projected to grow about 7.7% a year over that period, and private health insurance and Medicaid about 5.0% each.
• Per-person spending for people 65 and older was about $22,356 in 2020, well above the average for younger people.

National spending growth isn't the same as the price change you'll see. It includes more people, more services and new treatments, not just higher prices. But for a household budget, those forces show up together as rising premiums and out-of-pocket costs.

Modeling it

Three practical approaches:

1. Inflation plus a spread. Model health costs at general inflation plus 1 to 3 percentage points. If you assume 2.5% general inflation, use 4% to 5.5% for health care.
2. Separate line items. Treat premiums, out-of-pocket costs, dental and vision, and long-term care as separate lines with their own growth rates.
3. Phase-based. Model pre-Medicare years (marketplace) and Medicare years separately, because the cost structure changes sharply at 65.

In real-dollar plans (today's dollars), the spread is what matters: a 2-point spread means health costs roughly double in real terms over 35 years.

Age rating under ACA

Marketplace premiums depend on age, location, tobacco use and plan category. Under ACA rules, an adult's premium can vary by age by no more than 3 to 1, meaning the oldest adults pay at most three times the youngest adult rate for the same plan. Most of that increase happens in the 50s and early 60s, so a 50-year-old early retiree should expect premiums to climb steeply year after year until Medicare, even before any medical inflation.

Subsidies soften this. The premium tax credit equals the benchmark premium minus your expected contribution based on income, so when the benchmark rises with age, the credit rises too, as long as you're eligible. That's why age rating hits hardest for households above the 400% cliff, who pay the full increase. See the subsidy cliff.

Stress tests

• Cliff test: what if subsidies disappear because MAGI rises or rules change?
• Bad year test: add a year at the out-of-pocket maximum ($10,600 individual, $21,200 family on the marketplace in 2026).
• Spread test: run health care at general inflation plus 3 points instead of plus 1.
• Medicare premium test: Part B went from $185 in 2025 to $202.90 in 2026, nearly 10% in one year. Test sustained increases, plus IRMAA.
• Long-term care test: add a multi-year care period late in life. See long-term care planning.

Example

Illustration: a couple retires at 50 and spends $12,000 a year on health care in today's dollars (premiums after credit plus out-of-pocket). Assume general inflation of 2.5% and health inflation of 4.5%, a 2-point real spread, plus age-rating increases until 65 of about 4% a year in real terms for an unsubsidized household.

Calculations: subsidized grows by 1.02 per year (2% real spread); unsubsidized by 1.02 × 1.04 per year. For a subsidized household, the credit absorbs most age rating, which is why we only apply the spread in the first column (a simplification). The unsubsidized household's real cost more than doubles by 64. Over 15 years, the difference between the columns adds up to well over $100,000.

At 65 the structure shifts to Medicare premiums, supplemental coverage and drug plans. See Medicare Advantage vs Medigap.

What it means for a FIRE number

If health care is 15% of your spending and grows 2 points faster than everything else, your total spending drifts upward in real terms over time. A 4% withdrawal plan built on flat real spending may need a buffer. Common responses:

• Build health care as a separately growing line in your spending model.
• Hold a dedicated health reserve, such as an HSA.
• Plan flexible spending elsewhere so you can absorb health increases.
• Keep MAGI management in place so subsidies absorb premium growth before 65.

Related: sequence-of-returns risk.

Why medical inflation runs hot

Researchers point to several drivers: new technologies and drugs, an aging population using more care, labor-intensive services where productivity gains are slow, and pricing dynamics among hospitals, insurers and drug makers. Policy changes can bend the curve temporarily in either direction. For planning purposes, the cause matters less than the consistency: over long periods, assuming health care rises no faster than everything else has usually been optimistic.

Medicare years: a different curve

After 65, premiums no longer rise with age the way marketplace premiums do, but costs keep growing. Part B premiums are set each year to cover a share of program costs, so they tend to follow Medicare spending growth, which CMS projects at about 7.7% a year in total program terms through 2034 (partly reflecting enrollment growth). Medigap premiums can be community-rated, issue-age-rated or attained-age-rated depending on the policy and state; attained-age policies rise as you get older. Drug costs depend on your prescriptions and plan.

A practical modeling choice: assume Medicare-era costs grow at your health inflation rate, and add a separate step-up in your late 70s and 80s for higher use, dental work, hearing aids and other expenses that Medicare covers poorly or not at all.

Illustration: the 30-year view

Illustration: a single retiree spends $8,000 a year on health care at 65 in today's dollars. With a 2-point real spread, by 80 the real cost is about $10,770, and by 95 about $14,490. If the retiree also budgets a 25% use step-up at 80, the age-80 figure becomes about $13,460. Over 30 years, total real health spending exceeds $330,000 even before any long-term care. That's not a reason to panic; it's a reason to give health care its own line in the plan and its own growth assumption.

Keeping assumptions honest

Revisit the assumptions every year or two. Compare your actual health spending with your model and adjust. If your premiums jumped more than you assumed, raise the spread; if they didn't, don't cut it on one good year. Inflation assumptions are like seatbelts: most of the value appears in the years you hope never happen.

Where to put the money

Because health care costs are likely to grow faster than general prices, the assets earmarked for them benefit from growth too. An invested HSA is the natural home: contributions lower MAGI, growth is tax-free, and qualified withdrawals are tax-free at any age. Beyond the HSA, a Roth bucket gives flexibility for big medical years without raising MAGI for subsidies or IRMAA. See HSA-eligible plans.