Soaring health care costs dominate projected deficit increases

Some in Washington believe the nation can't afford to pass health-care reform legislation. White House budget director Peter Orszag told The Washington Post(WPO) on Tuesday that he believes the opposite is true: "Given the long-term nature of that problem, we simply can't afford to wait."

The good news in the White House's 10-year budget forecast is that this year's budget deficit estimate was lowered to $1.58 trillion for the fiscal year ending September 30. The bad news is that the 10-year budget-deficit estimate for 2010–2019 has been increased to $9.05 trillion from the previous estimate of $7.1 trillion, released in May.
But the nonpartisan Congressional Budget Office's revised 10-year budget deficit for that period is considerably lower, at $7 trillion. The CBO also forecasts a lower deficit for this year -- $1.4 trillion -- and the reason is the economic growth assumption. CBO expects the U.S. economy will grow at a 2.8 percent pace in 2010, while the Obama administration sees 2.0 percent GDP growth. (A faster-growing U.S. economy would increase federal receipts and cut spending on social services and other costs.)

Surging health care costs

But the CBO agrees with the Obama administration on the main reason for increasing deficits: the projected soaring costs for entitlements, including Medicare, Medicaid, and Social Security. "In the future, projected growth in entitlement spending explains almost all of the projected growth in total non-interest spending -- and the two big government health-care programs largely drive that increase," according to the CBO. "Medicare and Medicaid are responsible for 80 percent of the growth in spending on the three largest entitlements over the next 25 years and for 90 percent of that growth by 2080."

Further, CBO projects that net federal spending on Medicare and Medicaid will rise from about 5 percent of U.S. GDP in fiscal year 2009 to about 10 percent in 2035. Spending on Social Security is projected to rise at a much slower pace, from almost 5 percent of U.S. GDP in 2009 to about 6 percent in later years.

Two factors account for the projected growth in Medicare, Medicaid, and Social Security, the government's three largest entitlement programs, according to the CBO: the aging of the population, andthe rapid growth of per-capita health-care costs.

Wartime debt takes a toll

Of the remaining debt, Orszag blamed the Bush administration for worsening the nation's fiscal condition. In the interview, Orszag said that roughly 50 percent of the borrowing that will be needed over the next decade stems from President George W. Bush's refusal to pay for such expensive new programs as the 2001 tax cut, the Iraq and Afghanistan wars, and the new prescription-drug benefit program for Medicare recipients.

Fiscal Analysis: The CBO and the White House are in agreement: If federal health-care costs are not contained, the budget deficit will spin out of control.

And the way to reduce federal health care costs is by passing health care reform that contains: 1) universal health-care insurance that ends the economically absurd practice of routinely treating the uninsured in hospital emergency rooms at costs exceeding $1,000 an hour; 2) a public health-insurance company that will compete with private insurers for subscribers, and that will provide more incentives for insurance-premium containment; and 3) systemic changes to Medicare and Medicaid that lower per-person annual treatment costs.

(It's ironic -- and disingenuous -- that most Congressional Republicans oppose changes to Medicare that would make it more efficient: the Republican Party opposed Medicare's creation for roughly 70 years.)

Financial editor Joseph Lazzaro is writing a book on the presidency and the U.S. economy.
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