Therefore, a closer look at the health expenditures problem is warranted. Since 1990, U.S. health expenditures have grown just over 30% more than the economy has expanded, mainly in two spurts.
Unless the growth in health care expenditures slows relative to overall economic growth, rising health costs will sustain or increase barriers to expanded coverage. At the same time, that development would raise federal health expenditures, particularly those associated with Medicare and Medicaid spending, faster than tax revenue can increase from the nation’s economic growth. In turn, that situation would increase the nation’s budget deficits and undermine its long-term fiscal situation.
Already, Congressional Budget Office (CBO) Director Douglas W. Elmendorf has told the Congress that the U.S. is on an unsustainable fiscal path in which its debt will grow faster than its economy. Rising health expenditures will play a leading role in that development. On July 16, 2009, Elmendorf told the Senate Budget Committee:
Under current law, the federal budget is on an unsustainable path—meaning that the federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario for current law…
CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035 and to more than 17 percent by 2080. That projection means that in 2080, without changes in policy, the federal government would be spending almost as much as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years…
The large amounts of federal debt that would accumulate under each of CBO’s long-term budget scenarios imply that the government would have to spend increasing amounts to pay interest on that debt. The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges. Eventually, the government would need to adopt some offsetting measures—such as cutting spending or increasing taxes—to break the cycle and put the federal budget on a sustainable path.
Therefore, while a popular fallacy has it that overall growth in health expenditures is largely a matter of consumer choice and, therefore, is not necessarily a bad thing, that assessment is a fundamental misdiagnosis of the situation.
In fact, it is little different from the notions advanced by those who championed increased access to mortgages, even as the nation’s housing bubble moved toward its crest. A persistent situation in which health expenditures increase at a rate faster than economic growth is a dangerous economic imbalance. Income from economic growth must be sufficient to pay for health expenditures. Therefore, maintaining a situation in which health expenditures rise faster than the economy grows is unsustainable in the long-run.
Such a situation would require foreign capital inflows to make up the difference. It is unlikely that foreigners would readily finance what would amount to a health expenditures bubble so to speak. Far from offering foreigners attractive returns on investment, such a situation would put the U.S at increased financial risk. Such increased risk would lead foreigners to demand higher returns to compensate them for assuming that risk. As a result, long-term interest rates in the U.S. would rise. Rising long-term rates would impede economic growth, leading to an even larger imbalance were health expenditures to continue to rise.
Ultimately, such a situation would end badly for the U.S. At some point, the U.S. fiscal risks would be too great and foreign capital inflows would cease or reverse. Confronted by such a situation, the U.S. would need to make wrenching policy choices, many of which would be bad. Crippling tax hikes that would suppress economic activity could be levied. Medicare could suddenly be transformed into a means-tested program, leaving a significant share of senior citizens to find alternatives that might not exist at the time. The federal government could create a health care office modeled after the World War II-era Office of Pricing Administration. That Office’s price controls would create shortages and major distortions in the health care sector. In desperate fiscal straits, the federal government could enact a law requiring the Federal Reserve to purchase long-term Treasury securities at a fixed low-interest rate or it could even partially default on its debt via its deliberately encouraging inflation.
Recent polling data suggests that Americans increasingly understand the need to address the health expenditures problem. A July 9-13, 2009 Ipsos/McClatchey poll found that if Americans had to choose between expanded coverage and cost restraint as their top priority, 44% chose reining in rising health costs. In a July 10-12, 2009 USA Today/Gallup poll, 52% selected curtailing rising costs.
In coming weeks, public pressure on account of the legislation’s failure to address the health expenditures issue, as well as its increasing the nation’s debt by $239 billion in the 2010-2019 timeframe, will likely lead Congress to slow down the consideration process. It is unlikely that Congress will approve such legislation before its August recess on account of its flaws and public concerns about rising health costs and the legislation’s budget impact. It is plausible that Congress may not pass such legislation at all this year.
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