The pace of health spending growth remains the central domestic policy issue of this era. Health care spending has been a burden on the private sector. Rising costs of health care fueled premium increases that undercut the cash wages of U.S. workers and burdened the growth of small businesses. U.S. health care costs are widely cited as a competitive disadvantage by global companies.
Health care spending is the fiscal challenge. The inexorable rise in spending on federal health programs — notably Medicare, Medicaid and the Affordable Care Act — have driven mandatory programs from spending 41 cents of every federal dollar in 1974 to a projected 63 cents in 2024. Spending for defense, infrastructure, education, research and other core functions of government that the Founding Fathers would recognize is funded by the annual defense and non-defense appropriation bills. These are subject to budget caps and are being squeezed to historic lows.
The same health spending fuels an inexorable rise in federal deficits that will total $7.2 trillion over the next 10 years and reach $960 billion in 2024 alone. As a result, federal debt will rise from 74.4 percent of gross domestic product in 2014 to 77.2 percent in 10 years and spiral north thereafter. The fiscal outlook is unsustainable and dangerous to the nation’s future and is fundamentally a sad tribute to the growth of health programs.
These dangers remain despite the fact that there has been recent good news on the health-spending front. Medicare grew at roughly 6 percent annually from 2006 to 2010; it is now growing at less than half that pace. Medicaid and the Children’s Health Insurance Program spending is down from 2.3 percent annually to 1.5 percent. And the broadest measure of health spending, National Health Expenditure, grew only 1.9 percent in 2012, slower than the economy.
Some advocates are crediting the Affordable Care Act and declaring victory in bending the health care cost curve. This is premature. First and foremost, we have seen this movie before. From 1990 to 1999, National Health Expenditure grew an average of 0.9 percent slower than GDP, only to turn right around and average 1.8 percent over the next decade.
Second, this episode is at least in part more a tribute to bad economic growth than good health policy. The economic recovery has been anemic, featuring slow spending growth on everything, health included. As economic growth — presumably — ramps up, expect spending pressures to follow accordingly.
The third major caveat is the Affordable Care Act itself. The new law is designed to spend more on health care. Insurance subsidies and Medicaid expansions are intended to give millions of Americans better financial wherewithal to use medical services. Benefit mandates will broaden the range of services available for those subsidies. And limits on deductibles, co-pays and out-of-pocket costs will limit the increased use of incentives to manage personal health care costs.
Not so fast counter the advocates. The health care law is an alphabet soup of whiz bang (PCORI, CMSIC, ACOs, and more), clever techniques that they say will reduce the price of health care services. Perhaps but not yet. The medical component of the Consumer Price Index has risen at an annual rate of only 2.5 percent in 2014. But it is a low-inflation environment, so all prices are rising slowly; the non-medical CPI is up at a 1.9 percent rate. Since 2012, medical CPI has averaged 1.3 percentage points faster, only slightly below the 1.7 percentage points from 2000 to 2009.
These data imply that the recent slowdown reflects lower utilization of health services. This could be good news if it meant the elimination of unneeded and wasteful care, but it could also mean that families may be bypassing valuable and necessary care. They further imply that the future may hold either a spurt of catch-up spending, higher bills for untreated conditions or both.
The nation faces a choice on which risk it wishes to take. We could assume that health spending has been tamed and run the risk that the premium spikes, enormous deficits and sovereign debt risks arrive sooner and with greater impact than current projections. Or we could get serious about health care reforms that are more than writing coverage checks, drive market-based approaches to managing care and preserve incentives for high-value innovation in medical science. The latter option runs the risk that we “overfix” health care spending and in the process, free-up room for other priorities in the budgets of families, businesses and governments.
The press is filled with premature declarations of victory against health care costs. Advocates argue that the Affordable Care Act has “worked” and health care reform is now simply a piece of policy history. The budget brethren argue that entitlement reform has become unnecessary. Unfortunately, the data do not support these conclusions. And the balance of risks argues against adopting a path of inaction.
More on Health Care Spending:
Douglas Holtz-Eakin is the president of the American Action Forum. From 2001 to 2002, he served as chief economist for the Council of Economic Advisers to then-President George W. Bush, and from 2003 to 2005, he was director of the Congressional Budget Office.
- Health Care Policy
- Affordable Care Act
- health care