FiscalFuture

The U.S. economy is ailing, and more spending on health care will not heal the patient. Left to its current trend, federal health spending will take an ever-growing chunk out of the budget, crowding out other policy priorities. Unfortunately, the health reform debate has focused more on creating a new health entitlement program and less on responsible actions to make the current spending paths of Medicare and Medicaid sustainable in the long term.

The fiscal prospects are dire. In 2009, we incurred the largest federal budget deficit since World War II–$1.4 trillion or 9.9 percent of gross domestic product (GDP). Over the next decade, federal debt will double (from $7.5 trillion at the end of 2009 to $15 trillion in 2020) but GDP will grow by only 50 percent (from $14.2 trillion in 2009 to $22.5 trillion in 2020).

According to the Congressional Budget Office (CBO), the fastest growing federal programs are entitlements. Between 2012 and 2020, Medicare is projected to grow 6.8 percent a year and Medicaid will grow 6.1 percent a year. Social Security is third, at 5.4 percent growth annually. In contrast, total outlays will grow by 4.1 percent. Over the next decade, outlays for Medicare and Medicaid will exceed $11 trillion, accounting for more than a quarter of all federal spending.

It is time to put our fiscal house in order, and health spending is the first place we should look. Medicare is on a collision course with reality, with program spending continuing to grow faster than dedicated revenue. The program’s $37 trillion unfunded liability represents a real threat to future generations of workers who will pay higher taxes unless the program is reformed.

The program’s actuaries have been sounding that alarm for decades. The bad news is that time is running out. Baby boomers are starting to turn 65 and joining Medicare, with every expectation that taxpayers will pay for more and better health services as they age. The “birth dearth” generation that follows them will face increasing burdens, if only because there will be fewer workers to support the burgeoning populations of Medicare beneficiaries.

Congress has traditionally reduced payments to health care providers in the hope that this would slow Medicare spending, but that has not worked as growth in the use of services has swamped the price reductions. A better approach would change the way we pay Medicare providers so that the incentive is to provide better care, not just more of it. Moving from fee-for-service to a payment system that offers a predictable amount for a bundle of services can promote more efficient delivery of care. Holding Medicare to reasonable budget limits, allowing for a growing beneficiary population and adjusting for the health needs of those people, will be necessary if we expect to slow the growth of program spending.

Medicaid is a tougher problem. States are drowning in red ink, and expanding Medicaid could put them under. They need immediate help from the federal government, but we should be smarter about how we subsidize states. Instead of paying a large share of every bill that comes in, we need to move away from the perverse incentives of an uncapped entitlement to federal funds. A more predictable system of federal payments would require the states to manage their programs more efficiently, but that would engender stiff political opposition. Nonetheless, difficult actions will be forced upon us if we allow the current financing system to continue unchanged.

The country is in a deep recession and the federal government is facing record budget deficits. Health reform cannot be conducted in a vacuum, and it is reasonable to expect that spending in all major programs—including health—would be reduced as part of the effort to control the deficit. That argues for a policy agenda that establishes realistic fiscal goals and new financial incentives that make everyone in the system—patients and providers alike—more aware of the costs and benefits of their health care alternatives, and more responsible for their health care decisions.