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Health Care Spending and the Deficit

By November 15, 2012Commentary

The United States has an extremely serious debt problem, at $16 trillion currently and being added to at the rate of a trillion dollars a year.  No resolution of the “fiscal cliff” is expected to make a meaningful dent in the rate of debt accumulation.  Federal Reserve manipulation has kept the interest on the debt at historic lows, which keeps the deficit from being even larger.  When, as they inevitably will, interest rates rise and the government’s ability to issue unlimited amounts of debt ends, interest payments will become much larger, providing even more fiscal stress.  A new report from the Congressional Budget Office looks at deficit reduction and the role health care spending plays now and in the future.   (CBO Report)    One of the critical factors in deficits is growth in federal health spending; on a per capita basis it has grown about 1 1/2% faster than per capita GDP over the last 25 years.

Federal outlays for health care were about 2.7% of GDP over the last 20 years.  In 2012 they were 4.7% and by 2020 they will be 6.3% under CBO’s projections.  These expenses are a major contributor to the growth of federal spending and consequent deficits.  Among the methods that CBO lists to control future deficits is the obvious “make major reductions in the benefits that people receive when they get older, relative to the benefits envisioned in current policies.”  This only relates to Medicare in regard to health spending, so CBO should have added “reevaluate eligibility for and benefits in Medicaid and disability.”   In total, CBO finds about $420 billion that might be saved in 2020 from health care related spending changes, but there are much bigger opportunities that that from, for example, turning Medicare into all Medicare Advantage, stopping automatically putting disabled Social Security recipients on Medicare and turning Medicaid back to the states.  Sooner or later, drastic changes are going to have to be made because the debt and debt growth is not sustainable.  Painful as changes now will be, waiting risks a real disaster, not least for those dependent on these federal health programs.

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