Medicare, Medicaid Share Blame for Out of Control Health Care Costs, CBO Says

It’s nothing new to say that health care costs are increasing, but the Congressional Budget Office (CBO) has put forth some brow-raising new numbers in its most recent report; and although health care was not the only factor in increased spending, the report, in no uncertain terms points to the aging of the baby boomers and with them out of control spending on Medicare, Medicaid and Social Security.

 “The aging of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and as well as long-term care services financed by Medicaid,” according to the report. CBO predicts that per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for several years (although the magnitude of that gap is uncertain).

 According to CBO’s current projections, and if current laws remain in place, spending on the major federal health care programs like Medicare and Medicaid would grow from more than 5 percent of GDP today to almost 10 percent in 2037 and would continue to increase thereafter. Social Security, however, is projected to rise at a less alarming rate, from 5 percent of GDP today to more than 6 percent in 2030 and subsequent decades.

 Between the aging of our population and the soaring health care costs would cause spending on the major health care programs and Social Security to grow from more than 10 percent of GDP today to almost 16 percent of GDP 25 years from now, for a grand total increase of more than 5 percentage points for such spending as a share of the economy is equivalent to about $850 billion today. (CBO notes that, by comparison, spending on all of the federal government’s programs and activities, excluding net outlays for interest, has averaged about 18.5 percent of GDP over the past 40 years.)

 “To keep deficits and debt from climbing to unsustainable levels, as they will if the current set of policies is continued, policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two,” CBO said.

 According to the report, there are two main policy choices for the federal government. In one scenario, federal debt would decline from 73 percent of GDP this year to 61 percent by 2022 if current law remains in place, which would, for example, allow the Bush-era tax cuts to expire. Another scenario is to cut physician Medicare payments by roughly 31 percent and make other significant cuts in spending in health programs.

 The CBO offers some suggestions to lawmakers in dealing with the grim situation, commenting that “the explosive path of federal debt under the alternative fiscal scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course.”  There are, of course, difficult trade-offs in deciding how quickly the budget deficit must be fixed. CBO notes that,  “on the one hand, cutting spending or increasing taxes slowly would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect. On the other hand, abruptly implementing spending cuts or tax increases would give families, businesses, and state and local governments little time to plan and adjust, and would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations.”