The American Health Care Crisis and the Federal Deficit
The United States spends more than any other country on medical care. In 2006, U.S. health care spending was $2.1 trillion, or 16% of our gross domestic product. At the same time, more than 45 million Americans lack health insurance and our health outcomes (life expectancy, infant mortality, and mortality amenable to health care) are mediocre compared with other rich democracies. We spend too much for what we get.
Nothing is new about these sobering realities. The Nixon administration first declared a health care cost crisis in 1969. Four decades later, the United States still has not adopted systemwide cost controls because the politics of health care make it extraordinarily difficult to control costs. I explain below why this is so (Marmor, et al., 2009).
The starting point for understanding the politics of cost control is an axiom of medical economics: A dollar spent on medical care is a dollar of income for someone. In other words, national health expenditures constitute the money that the medical care industry -- from physicians, nurses, and hospitals to pharmaceutical companies, insurers, lawyers, and sales and marketing staff -- earns. Controlling costs necessarily requires restraining the industry's income. As a consequence, serious attempts at cost control produce a battle with stakeholders who have resources, political clout, and strong incentives to oppose measures that reduce the rate of medical spending growth and their income (Marmor, et al., 2009).
On March 20, 2010, the Patient Protection and Affordable Care Act was put into law, after year-long debate on the issue of health care reform. The Act benefits the vast majority of Americans, including seniors, the middle class and the sick and uninsured. However, what impact does the Act have on the federal deficit? The health care crisis that spawned the Act, I argue, which will lead to an unmanageable federal deficit.
My argument is based on the reasoning of Douglas Holtz-Eakin and Michael Ramlet where they argue in a 2010 issue of the Health Affairs that health reform law will widen the federal deficit rather than reduce them. Their logic is based on how much the federal government spends on health care with the Act and budgetary elements.
The federal government faces a daunting fiscal outlook, which makes the budgetary impact of the Patient Protection and Affordable Care Act even more important. The official Congressional Budget Office (CBO) analysis indicates modest deficit reduction over the next ten years and beyond. Eakin and Ramlet examine the underpinnings of the CBO's projection and conclude that it is built on a shaky foundation of omitted costs, premiums shifted from other entitlements, and politically dubious spending cuts and revenue increases. A more comprehensive and realistic projection suggests that the new reform law will raise the deficit by more than $500 billion during the first ten years and by nearly $1.5 trillion in the following decade. The United States faces a daunting budgetary outlook. The Obama administration's budget displays an unsustainable debt spiral over the next decade. In this context, the fiscal consequences of the newly enacted Patient Protection and Affordable Care Act are of extreme importance.
Proponents of the health care reform law point to the Congressional Budget Office (CBO) analysis, which suggests a modest contribution to deficit reduction over the budget window and beyond. Proponents also argue that the CBO understates the beneficial reductions in the pace of healthcare spending. Opponents suggest instead that the act will exacerbate the fiscal outlook, as politically unrealistic spending reductions and tax increases fail to offset new entitlement spending. These arguments were briefly examined via the use of simple alternative scenarios. On balance, it is difficult to conclude that the act will not accelerate the coming fiscal crisis (Eakin and Ramlet 2010). However, opposing viewpoints concerning the economic benefits of the Act have been put forth. In Health Care Reform and American Politics: What Everyone Needs to Know (2010), Lawrence Jacobs and Theda Skocpol argue that the Patient Protection and Affordable Care Act will actually reduce deficits. Their argument is based on the fact that the Act removes the Medicare doughnut hole for seniors, insures the young and saves middle class Americans thousands of dollars a year on health care expenses. According to Jacobs and Skocpol, "the winners of health reform are the vast majority of Americans. When the provisions are effectively implemented, seniors, the sick, and middle Americans -- including many families in the upper middle class -- will receive wider and easier access to health insurance benefits protected from trickery by the insurance industry. The number of working-age Americans and their children who have to go without basic health insurance will decline by a remarkable 32 million people. This comes from the nonpartisan CBO, which projects that coverage will be extended to 94% of all Americans and legal immigrant residents (up from 83% today). About a third of the remaining uninsured will be undocumented or illegal immigrants, who are not eligible for coverage under the reform law… "The bill for health reform will be paid by multibillion dollar corporations in the health insurance industry, by pharmaceutical producers, and by medicalcare providers, as well as by slightly higher taxes on very rich families (individuals whose yearly incomes exceed $200,000, or married couples earning over $250,000). The tax dollars raised from those at the top are mostly to be used for subsidies to reduce the premiums paid by millions of middle-income Americans, and also to help people working for low wages who have been unable to afford private insurance in the past. The bottom line for the vast majority of Americans is more benefits, greater security, less cost" (Jacobs and Skocpol, 2010). However, as we shall see, Jacobs and Skocpol do not take into account the health economics of the issue and fail to understand the fiscal implications of the Act for the federal deficit.
An Approaching Fiscal Train Wreck
The federal government's unsustainable long run fiscal posture has been outlined in successive versions of the CBO's Long-Term Budget Outlook. In broad terms, over the next thirty years, the inexorable dynamics of current law will raise outlays, or committed federal expenditures, from about 20% of gross domestic product (GDP) to 30 -- 40% of GDP. Any attempt to keep taxes at their postwar norm of 18% of GDP will generate an unmanageable federal debt spiral. In contrast, ratcheting up taxes to the 30 -- 40% of GDP needed to match the federal spending appetite would likely be self-defeating, as it would undercut badly needed economic growth (Skinner, 1996). The policy problem is that spending rises above any reasonable level of taxation for the indefinite future. The diagnosis leads as well to the prescription for action. Over the long-term, the budget problem is primarily a spending problem, and correcting it requires reductions in the growth of large mandatory spending programs and the appetite for federal outlays.
This depiction of the federal budgetary future has been unchanged for a decade or more. However, the most recent administration budget shows that in part as a result the financial crisis, recession, and policy responses, the problem has become dramatically worse, and will arrive more quickly (Eakin and Ramlet, 2010)
The federal government ran a fiscal 2009 deficit of $1.4 trillion -- the highest since World War II -- as spending reached nearly 25% of GDP and receipts fell below 15% of GDP. In each case, the results are unlike those experienced during the past fifty years. Going forward, there is no relief in sight. Over the next ten years, according to the CBO's analysis of the President's Budgetary Proposals for Fiscal Year 2011, the deficit will never fall below $700 billion. In 2020 the deficit will be 5.6% of GDP -- roughly $1.3 trillion, of which more than $900 billion will be devoted to servicing debt on previous borrowing.
The budget outlook is not the result of a shortfall of revenues. The CBO projects that over the next decade the economy will fully recover and that revenues in 2020 will be 19.6% of GDP -- more than $300 billion more than the historic norm of 18%. Instead, the problem is spending. Federal outlays in 2020 are expected to be 25.2% of GDP -- about $1.2 trillion higher than the 20% that has been business as usual in the postwar era (Eakin and Ramlet, 2010). As a result of the spending binge, in 2020, public debt will have more than doubled from its 2008 level to 90% of GDP and will continue its upward trajectory.
Budgetary Effects Of Health Reform
In light of the fiscal threat from growing spending, the budgetary impacts of the Patient Protection and Affordable Care Act are central to any discussion of its merits. I begin by reviewing the CBO cost estimate that concludes that the act will serve to lower projected deficits over the next ten years and beyond. After our summary review, I analyze the budgetary implications of…