Will Federal Health Care Costs Cripple Deficit-Cutting?

Heath care expenditures by the government are growing rapidly, despite the passage of President Obama's health care reform bill earlier this year. Will these costs end up damaging efforts to rein in the federal budget deficit in the years ahead?

The Congressional Budget Office (CBO) released a grim report last week noting that the federal debt had risen from 40% of gross domestic product in 2008 to 62% of GDP this year. That's expected to rise to 80% of GDP in 2035. If the Bush tax cuts are extended, the CBO said, the debt would rise to 185% of GDP by 2035. Spending on mandatory health care programs are expected to double as a percentage of GDP by 2035.

"Growth in spending on health care programs remains the central fiscal challenge," said CBO director Douglas W. Elmendorf. "In CBO's judgment, the health care legislation enacted earlier this year made a dent in the problem, but did not substantially diminish that challenge."

A Decrease in the Deficit?

Health care experts are deeply divided about what should be done.

David M. Cutler, a senior fellow at the Center for American Progress, a left-leaning Washington, D.C., think tank, says that while the CBO's projections indicated that the country faced a huge deficit problem, the health care numbers were actually better than he had expected.

The CBO estimate said that in the period from 2010 to 2019, the passage of "Obamacare" would mean an increase in outlays of $382 billion and an increase in revenues of $525 billion, meaning a decrease in the deficit by about $143 billion due to health costs. For the following 10 years, the CBO said deficits would be reduced by about 0.5% of GDP, which Cutler says amounts to savings of more than $1 trillion.

Cutler also says the CBO left a number of key savings out of its calculations, including "Anything about innovation to make the health system more efficient, anything about innovation that would for example reduce administrative costs, any organizational changes that mean we don't practice care that is not consistent with guidelines." He says they were excluded from the budget projections because they couldn't be modeled by economists.

"People like me think there is absolutely enormous potential in those type of things," Cutler says, citing a hospital administrator who told him that current costs are about 25% above what they need to be.

Will Required Cuts Really Get Made?

But Joseph Antos, a scholar at the American Enterprise Institute, says a lot of the things left out of the CBO estimate are uncounted expenditures that are going to reduce the health care bill's ability to cut the deficit.

"The health care reform act is going to add far more to the deficit than the CBO said, even in the first 10 years," Antos says. "The legislation is more complex than almost anything that been passed in the last 20 years, and its inherent uncertainty about the impact on the deficit is much, much greater."

Most of the savings in the Obama bill would come from cuts in Medicare reimbursements to doctors and hospitals, Antos says.

"Will a future Congress really follow through and cut hospitals, cut doctors and cut various providers in terms of their Medicare payment rates?" Antos asks. "The performance of the last six to eight years on physician payments strongly suggests that the cuts will be nowhere near as dramatic as were passed into law."

In addition, Antos says, the CBO estimates don't include the costs necessary to get the bill's provisions off the ground, such as paying for the Department of Health and Human Services to set up the nationwide insurance exchanges that the legislation provides for. He estimates that will cost between $120 billion and $130 billion, wiping out any potential savings achieved through Medicare cuts.

Possible Solutions

Economists are also divided on what the government should do about the huge deficits that lie ahead.

Cutler suggests that raising the retirement age for Social Security and cutting benefits to people with higher incomes may be necessary. He says the government should also look at the possibility of imposing a value-added tax, a kind of national sales tax.

Antos would like the Obama administration to delay implementation of health care reform from the currently scheduled 2014 to a minimum of a year later. He would also like to see the eligible income level for federally subsidized insurance to be reduced from about $90,000 to about $72,000 and the amount of the subsidies to be reduced substantially.

"We need to put our resources toward low-income people," Antos says. "We need to put less resources toward the middle class." Antos says the subsidies will cost the taxpayer $80 billion in 2014 alone and will rise from there.

What's clear is the period after 2020 is unchartered waters as far as budget estimates are concerned. With spending on mandatory health care programs likely to spiral upward, no one really knows exactly how much the federal debt may be increased. That uncertainty may give budget hawks in Congress cause for concern.