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In an important new report, the Congressional Budget Office presents a troubling estimate of long-term growth in health care spending. If the projections are even close to correct, they will have a profound impact on tax and budget policy for the foreseeable future. "This is the central long-term fiscal challenge facing the U.S.," says CBO director Peter Orszag.
While his estimates are new, Orszag's conclusions echo those of just about all of his predecessors at CBO: If we don’t find a way to slow the growth of health care costs, Medicare and Medicaid are going to eat the federal budget. The inevitable result: draconian cuts in the two programs themselves and some combination of untenable reductions in other federal spending and huge, unacceptable tax hikes.
The new CBO projections estimate that federal spending on Medicare and Medicaid will nearly double from 4% of GDP today to more than 7% in two decades, and nearly double again to 12% by 2050. To put those numbers in context, the entire discretionary budget of the federal government this year is 7.8% of GDP, and total federal revenues are about 18%.
CBO uses some heroic assumptions in its forecast. It must, since if current medical cost growth continues, total health care spending will reach 99% of GDP in 75 years. This is the ultimate example of the late Herb Stein's famous aphorism: If present trends can't continue, they won't.
To get out of that analytical box, CBO for the first time assumes that as costs grow, demand will somehow fall. States, which pay for half of Medicaid, will find ways to slash that program. Both Medicare and private insurers will increase premiums and consumer cost sharing, which in turn will also drive down the use of medical care. The forecast assumes no big changes in overall federal health policy, such as new coverage for the uninsured.
As CBO notes, none of this will be painless. Consumers will spend more and, in at least some cases, treatments will no longer be covered at all by insurance. Thus, there is a hint of the old joke about the two economists stranded on a desert island with cans of food but no way to open them. "Assume a can opener," says one.
How and when will any of this happen? CBO doesn’t say. But the report is yet more evidence that the health care policy decisions we make—or fail to make—will have far more influence on future tax policy than most policy-makers want to admit.
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