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CBO on Why Health Spending Grows (and Why I’m Not Comforted)

May 30th, 2008 . by economistmom

Yesterday CBO released an issue brief explaining the long-term projected growth in Medicare and Medicaid spending as a share of the economy.  (Nice job, Noah!)  CBO Director Peter Orszag blogged on it, too.

Here’s the main conclusion, as summarized in Peter’s post (my emphasis added):

Regardless of the assumptions and methods used in the projections, the results were basically the same: More than half of the growth in federal spending on Medicare and Medicaid is attributable to health care costs per person growing more rapidly than per capita GDP. Depending on the approach used, by 2082 between 53 percent and 60 percent of the accumulated growth is attributable solely to cost growth, between 14 percent and 17 percent is attributable solely to aging, and the remainder (between 26 percent and 30 percent) is attributable to the interaction of those two factors as costs grow and the population ages at the same time. Over the next 25 years, aging will be relatively more important, accounting for between 27 percent and 35 percent of projected growth by 2032, but even during that period, CBO’s estimates suggest that more than half of the growth in spending will result from rising costs per beneficiary.

I suppose at first blush one might say this has good, optimistic policy implications, because only about 15 percent of the growth in health spending is due to forces beyond our control.  (We can’t stop people from growing older–or at least we can’t morally consider the alternative.)  Most of the growth in health spending is due to the “excess cost growth” of per capita health spending rising faster than per capita GDP (i.e., health costs growing faster than the economy).  That cost growth is at least potentially within our policy control.

But consider what CBO’s numbers imply about how much we’d have to avoid in that “excess cost growth” in order to eliminate the rise in Medicare and Medicaid spending as a share of GDP.  Even if the aging of the population (what we can’t change) is only 15 percent of the problem, that means that the excess cost growth (what we might be able to change) which is the other 85 percent, would have to be avoided by more than 100 percent (or cut by 100/85=118%), in order to “flat line” health spending as a share of GDP.  In other words, we’d have to be able to get health costs to actually grow slower than the overall economy (not just less faster).

I view this as a daunting challenge and am not comforted by even CBO’s optimistic attitude in their commitment to work hard on analyses of health spending and ways to control it.  The politicians certainly don’t like to talk about “rationing” health care, so they talk about much less awful sounding ways to control health costs, such as improving the use of medical information technology.  But in another very recent CBO analysis, on the costs and benefits of health IT, CBO notes that (my emphasis added):

…a recent study by the RAND Corporation estimated about $80 billion in net annual savings that is potentially attributable to such technology. This study has received significant attention, but unfortunately it suffers from significant flaws…

CBO notes that the $80 billion savings figure is for all health care spending (not just federal spending) and is only a “potential” impact under “widespread adoption.”  They also point out that total health care spending in the U.S. economy is about $2 trillion per year, so the $80 billion is only 4 percent of the total health bill.  In other words, those “much less awful sounding” ways of reining in health care costs are also much less likely to be successful.

So I am not comforted by analyses that determine that most of our long-term fiscal challenge is due to the excess cost growth in health spending, rather than just the unavoidable aging of our population.  We can look at optimistic projections that assume some slowing in that excess cost growth (e.g., as the Medicare Trustees do), but the reality is that we are still far from understanding what policies would actually work to step on the brake–and whether our society can tolerate such policies.

That gets back to the basic budget math and why I think there’s no way one can argue that the “right” level of government spending is that which can be supported by revenues at their 40-year historical share of GDP.

One Response to “CBO on Why Health Spending Grows (and Why I’m Not Comforted)”

  1. comment number 1 by: Russ H

    Just stopped by to take a look. Good info and great Blog.. Thanks!