Monday, February 28, 2011

The health care problem for the US economy

The President Obama's Budget proposals has generated an intense debate about how to rein in America's deteriorating fiscal balance. The Republicans are expectedly talking about cutting wastage and big government, and training their guns on Social Security and non-defence discretionary spending. But where do the real problems lie? The CBO's long-term Budget Outlook summed up the public debt challenge facing the US economy thus,

"At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (as measured by gross domestic product, or GDP), a little above the 40-year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year—the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments."

The CBO projects that if current laws (including the recent Affordable Health Care Act) do not change, federal spending on major mandatory health care programs will grow from roughly 5 percent of GDP today to about 10 percent in 2035 and will continue to increase thereafter.

In contrast, the CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2030 and then stabilize at roughly that level. This means that health care, and not social security, should be the primary focus of initiatives aimed at balancing the budget.

As Ezra Klein perceptively indicated, the US Government could easily be mistaken for an insurance conglomerate protected by a large, standing army. Atleast that is what the graphic below points to. Left unattended, Medicare and Medicaid alone are projected to double in size over the next 30 years, from the current 20% of the budget.

Paul Krugman highlighted the critical role of Government in health care. In 2009, 71% of total US health care spending was through some form of health insurance provider. And of this, 68% came from the various government health care providers.

Paul Krugman has this and this to say about the futility of cutting the bloated defense budget and thereby addressing the fiscal deficit. He is spot on with his conclusion, "Even a drastic cut in military spending wouldn’t release enough money to offset more than a small fraction of the projected rise in health care costs."

And, as the graphic from Free Exchange indicates, the search for a solution to balance the budget by cutting non-defence discretionary spending is "madness". It was equal to 3.6% of GDP in 2008, the same as in 1963, and forms just 12 % of the current budget. It is also not projected to rise substantially in the future. The room for manoeuvre with budget balancing by cutting this looks very marginal, hardly enough to make a meaningful dent.

Paul Krugman argues that any serious effort to address the deficits should involve health care reforms and some increases in taxes so as to bridge the revenue gaps. About the types of health care reforms he writes,

"It might include things like giving an independent commission the power to ensure that Medicare only pays for procedures with real medical value; rewarding health care providers for delivering quality care rather than simply paying a fixed sum for every procedure; limiting the tax deductibility of private insurance plans; and so on."

See also this excellent post on the fiscal crisis facing America by Simon Johnson.

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