Health Costs Haunt the US’ Long Term Budget Outlook

Jane Sarasohn-Kahn

First published 6/24/11 on Health Populi

“With the aging of the population and growing health care costs, the budget outlook, for both the coming decade and beyond, is daunting,” reports the Congressional Budget Office (CBO) in the2001 Long-Term Budget Outlook report. If you read between the lines and into the future scenarios on health spending and budget deficits, it’s clear that as Baby Boomers age, America’s fiscal outlook gets bleaker by the year.

Spending on Medicare, and health care as it’s paid for today, is unsustainable. The pie chart shows that 22% of spending on health was for Medicare in 2009, 17% was allocated to Medicaid and CHIP for children, and 11% of spending was for other public health programs provided by state and local governments, the Department of Veterans Affairs, the Department of Defense, and workers’ comp.

In a sidebar in the report on page 10, the CBO quantifies how the aging of the population and increasing health care costs impact federal spending on what are called “mandatory programs.” These programs include Social Security, Medicare, Medicaid and the health insurance subsidies included in the Affordable Care Act to cover the uninsured that seek health plans involved in the health insurance exchanges, among other programs. CBO calculates that it’s the health programs that account for 80% of the total increases in spending on mandatory programs in the next 25 years.

2 factors are driving that growth:

  • Aging of the U.S. population, which increases the number of beneficiaries in Medicare
  • Growth in per beneficiary spending on health care.

CBO’s actuaries find that it’s the aging portion that’s more important, accounting for two-thirds of the total projected growth in spending on Social Security and health care by 2035. That’s a federal budget double-whammy: Social Security plus Medicare.

Health Populi’s Hot Points:  While  the CBO identifies aging and growth in the number of beneficiaries as the bigger driver in the budget forecast 25 years hence, America’s ability to re-engineer health care delivery and financing very soon is crucial for both the public and private sector coffers. The pie chart reminds workers and taxpayers in the U.S. that we’re both a publicly and privately financed health system. So whether we’re covered by either sector, we all have a stake in making health care less costly and delivering higher quality per dollar to each health citizen in the nation.

A current illustration of the importance of slowing and lowering health costs is symbolized by the current debate over the recent McKinsey survey into employer-sponsored health care. reps  McKinsey published a survey earlier this month projecting that about one-third of U.S. employers would drop health insurance coverage once the Affordable Care Act is implemented. Other studies refute McKinsey’s findings, from Avalere, Robert Wood Johnson, and the Urban Institute. Jonathan Cohn of the New Republic explains it all here.

Regardless of where one might stand on the debate, the point is that health care in the U.S. is inefficient, largely ineffective for millions of American health citizens, and too costly to pay for as we see the obvious demographics that face us: more aging Americans than younger people who can support either Medicare and Medicaid as they are currently organized and financed. All stakeholders will have to put skin in the game — not just workers and retirees who face increasing out-of-pocket costs, conservatively comprising 13% of health spending based on the CBO data in the chart. Suppliers to the industry, providers, plans, along with people, will be digging deeper. Profit margins for the existing players — suppliers and payors, listen up — will be further pressured. The health system disruptors, including information and communication technology companies, food purveyors, and comfort-shoe designers: you will be part of the solution to making health care cheaper. Health, wellness, and vitality across age cohorts are the collective mantra. Aging in America can no longer be about expensive nursing homes and institutional care.

For another take on the CBO data regarding relative cost growth between Medicare and the private sector, see the great Incidental Economist blog post on “Misunderstanding the CBO.”

Jane Sarasohn-Kahn is a health economist blogging at Health Populi.

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