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HEALTH SPENDING: A Growing Economic Crisis

February 26th, 2008

Editor’s Note: The following post by Rep. Jim Cooper (D-TN) comments on the projections of national health spending from 2007 through 2017, published today by Sean Keehan and his colleagues in the Centers for Medicare and Medicaid Services Office of the Actuary as a Health Affairs Web Exclusive. 

Although there’s a lot of explosive material in the latest National Health Expenditures forecast, policymakers will probably continue to ignore the dangers it presents. The few lawmakers who worry about health spending as a percentage of gross domestic product (GDP) will see little new: as expected, the health sector will grow to nearly 20 percent of the economy over the next ten years. Of course, most lawmakers will never see the article in Health Affairs or understand the threats it contains. 

Continuation of current trends in health spending is shaking the U.S. to its fiscal foundations by damaging federal credit. Annual growth rates in health spending of 6.7 percent — 1.9 percentage points higher than the rest of the economy — are almost universally agreed to be “unsustainable.” 

When you dig into the numbers, it becomes harder to justify that one sector of our economy, health care, gets to absorb so much more of our resources than any other sector, while not doing more to improve our health. Although the projected 1.9 percentage point increment is smaller than the annual 2.5 percentage points that the health sector took for most of the last several decades, it will still crowd out many vital nonhealth care needs. This extra slice for health care is not a legislated entitlement but, in a sense, is the greatest “entitlement” problem we face: how to wean the bloated health sector from decades of juicy subsidies. 

Virtually every policy expert will tell you that our health care spending is our biggest budget problem, yet Washington continues to be strangely silent and passive in its budgets. No major presidential candidate mentions the pending catastrophe for fear of depressing the electorate. Of course, it’s always easier to say that you will think about tough subjects after the next election. And besides, our entitlements have been unsustainable for so long, perhaps they can hold on a little bit longer. 

The private sector is making these federal budget problems harder to ignore. Both Standard & Poor’s and Moody’s are projecting that the U.S. Treasury bond could lose its AAA rating within the next five to ten years as a result of financing problems with Medicare and Medicaid. Such a downgrade could make today’s subprime problems look trivial because the T-bond is, as Moody’s says, “the anchor to the world’s financial system.” And losing the AAA rating is just the beginning of trouble unless underlying trends are altered. S&P projects that by 2015 the U.S. could have the same credit rating as Estonia, by 2020 a Mexican credit rating, and, by 2025 junk-bond status. 

To an economist, higher levels of taxation may always be assumed in order to fund growing benefits. But in Congress, taxes may not be so flexible upward. After dipping sharply during the initial years of the Bush administration, federal revenues are now back above 18.4 percent of GDP, the bipartisan, 50-year average for U.S. taxation. To permanently raise taxes above these levels risks grave damage to the political party that advocates the change, unless perhaps the public feels that they are getting their money’s worth. This is very difficult to achieve when the favorite political maxim is, “What have you done for me lately?” Economists may not feel it, but the tradition of American exceptionalism extends to our lower relative levels of taxation. I doubt that most of my colleagues will vote for European levels of taxation, even for a promise of European-style benefits. 

While these projections take us into the future, problems that we are facing are in fact just around the corner. Already cracks can be seen that stretch underneath the most important and most popular federal programs in America: Medicare and Social Security. As the Health Affairs article notes, without congressional intervention, official U.S. policy will be to cut physician Medicare reimbursement by 25 percent over the next ten years. This is news to most physicians who call on my office, none of whom has been briefed by their medical society about the implications of the Balanced Budget Act of 1997. The annual Band-Aids that Congress has been applying only worsen the long-term problem, which the Treasury has estimated to be $5 trillion in size. 

I am glad that Health Affairs is continuing its tradition of alerting its readers to the important health care issues of the day. These issues are so large that they cloud the future of the nation. 

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1 Trackback for “HEALTH SPENDING: A Growing Economic Crisis”

  1. Farmanux News
    March 4th, 2008 at 6:02 pm

4 Responses to “HEALTH SPENDING: A Growing Economic Crisis”

  1. John Welton Says:

    Representative Cooper, one little discussed aspect of the future cost of heath care in the US is the retirement of many experienced nurses, physicians, and other essential medical professionals. This will tend to balance or offset the rising numbers of hospital admissions and potentially lead to rationing of acute care. For example, we can anticipate loosing nearly 1/4 of all hospital RNs due to retirement by 2019 and over 40% by 2024. This will substantially and profoundly affect delivery of acute care in the coming decades leading to closure of hospital beds, long delays for elective surgeries and procedures and escalating diversion of ambulances. Perhaps the cost issue will not be as ominous as the deterioration in access and quality of our future health care system.

  2. richard smith Says:

    Like many govenment programs, healthcare is over-promised and under-funded.

  3. james mcniff Says:

    Rep. Cooper, I understand the political risk in adopting a European style of health care but what are our options?….we must reduce we eliminate insurance companies and implement a medicare type of program to achieve the savings of administrative simplification?..probably not,insurance companies will fight to we prevent hospitals from growing and investing in their communities health care..probably not, we know how many people the health care industry employs…I believe the insurance industry and health care organizations will be pushed by the market to improve quality and reduce costs however this will be incremental not a major what is left?..If the European system is too strong of a medicine ,let’s look at Australia….otherwise i agree with you that we are heading into the perfect storm..

  4. Neil Gardner Says:

    Rep. Cooper, On the same blog page is a piece by a repub colleague of yours who acknowledges the same economic dangers. However, he suggests the repub market solution, not doubt some form of Consumer Directed healthcare which will magically sustain the system while no doubt giving effective care to all. I don’t buy that in the least.

    In your piece, you do not make any suggestions for a solution to this problem, and I am wondering what your suggested solutons might be??

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