Health care programs are the largest and fastest growing in the federal budget. These programs include Medicare (providing health insurance for older Americans), Medicaid (providing health insurance for lower-income Americans), the Children’s Health Insurance Program, and subsidies for individuals to purchase private health insurance under the Affordable Care Act. Currently they comprise almost 30 cents out of every dollar spent by the federal government.
Spending on these programs equals 5.5 percent of the gross domestic product in 2017. But over the next 30 years, that spending will swell to 9.3 percent of GDP. This rapid rise accounts for almost three quarters of the projected growth in non-interest spending over that time period, meaning that any plan to address the nation’s long-term fiscal challenges depends on making these health care programs sustainable.
What exactly is driving the growth in spending on these programs? The largest factor is demographics: Over the next 15 years, three quarters of the projected growth in health care spending is attributable to an increase in beneficiaries. This is due to the aging of the population and the retirement of the baby boom generation. The remaining quarter is due to the fact that the cost of health care is growing faster than the rest of the economy.
In the following 15 years, however, the ratio reverses: three quarters of the projected spending growth is attributable to growing health care costs while beneficiary growth accounts for just one quarter. Whereas the growth in beneficiaries levels off as the baby boomers complete their transition into retirement, health cost inflation only continues to get worse the farther out we get. Thus, no amount of tax increases or benefit reductions could stabilize these programs without getting growing costs for care under control.
There are a number of ideas with at least some bipartisan support among health policy experts that have the potential to rein in these costs. Reducing tax subsidies for employer-provided insurance, for example, would reduce the incentive to spend more on health care than other goods. Reforms to provider payments that reward quality over quantity of services could also serve to realign incentives and limit unnecessary spending. Finally, allowing the cost controls in the Affordable Care Act, including the Cadillac Tax on high-end insurance plans and the Independent Payment Advisory Board (which has the authority to reduce provider payments when spending grows too fast), to go into effect would help further bend the health cost curve.
Policymakers should look to these and other ideas in making these important health care programs sustainable and ensuring they will continue to be strong for future generations.