Did you hear the fantastic news about Medicare? Like many Americans, you’ve probably been laboring under the delusion that the social insurance program was posing some sort of long-term threat to the fiscal stability of the US government. Maybe you heard that it is gobbling up a greater and greater share of the federal budget. Maybe you’ve even seen a chart something like this one from the Congressional Budget Office:
Well, relax. Turns out this whole “Medicare is going to bankrupt America” thing is a big nothingburger. At least, that’s what many liberals are saying these days. They argue that the Congressional Budget Office is wildly overestimating future health care cost inflation. And if health care costs rise more slowly than what the CBO forecasts they will, Medicare spending will rise much more slowly. Here is blogger Yves Smith over at Naked Capitalism:
A remarkably important and persuasive paper that calls into question the need for “reforming” Medicare has not gotten the attention it warrants. “An Examination of Health-Spending Growth In The United States: Past Trends And Future Prospects” by Glenn Follette and Louise Sheiner looks at the model used by the Congressional Budgetary Office to estimate long term health care cost increases. Follette is chief of the Fed’s fiscal analysis section. Sheiner, a fellow member of that group, has worked for both the Treasury and the Council of Economic Advisers previously. …The fundamental beef of Follette and Sheiner with the CBO model is that it naively assumes past growth in health care spending as the basis for its long-term projections. The result is that it shows that trees will grow to the sky. …. CBO’s performance on this front looks like malpractice.
The Naked Capitalism post has spread far and wide across the liberal blogosphere and is now part of the regular set of talking points offered by left-of-center pundits — as I found out last night on CNBC’s Kudlow Report when debating economist Dean Baker. Baker elaborated in a recent op-ed:
Recently a paper from the Federal Reserve Board documented this argument in considerable detail.
… While the CBO projections assume that age-adjusted health-care costs rise considerably more rapidly than per capita income, in the last four years they have been roughly keeping pace with per capita income.
In fact, in the last year, nominal spending on health-care services, the sector that comprises almost two-thirds of health-care costs, rose by just 1.7 percent. This is far below the rate of nominal GDP growth over this period, which was more than 4.0 percent. While at least some of this slowing in health-care costs is undoubtedly due to the downturn, it is hard to believe that it is not at least partially attributable to a slower underlying rate of health-care cost growth.
CBO and other budget forecasters can ignore economic reality for a period of time (they ignored the housing bubble until after its collapse wrecked the economy), but if it continues, at some point they will have to incorporate the trend of slower health-care cost growth into their projections. When this happens, the really scary long-term deficit numbers will disappear
Well, here’s your trouble: That paper seems to have been written in 2008. If so, it fails to take into account recent CBO work on the subject of health care inflation. Much of the debate concerns how much the the annual growth rate of nominal Medicare spending per beneficiary – adjusted for demographic characteristics of the relevant populations — exceeds the annual growth rate of potential gross domestic product per capita, on average. Follette and Sheiner and Baker and Smith knock the CBO for failing, as Baker says, “to incorporate the trend of slower health-care cost growth into their projections.”
But I’m not sure that is correct. Since that paper was written, CBO has been lowering its estimates of excess cost growth. While from 1975-2010, excess cost growth has averaged 2.1% a year, CBO now uses 1.6% as its “anchor” to take into account the recent slowing of costs. And in its long-term budget forecast, the CBO directly addresses the issue:
Even without policy changes, though, actual spending for health care could be much lower or much higher than the figures contained in CBO’s and other analysts’ projections. For comparison purposes, CBO projected federal spending for Medicare, Medicaid, CHIP, and the exchange subsidies using varying assumptions about excess cost growth after 2022 under the extended alternative fiscal scenario.
For example, a projection in which excess cost growth is held constant at zero is useful because it isolates the effects that the aging of the population and policy changes have on spending. In that case, the federal government’s spending for major health care programs would increase from 5.4 percent of GDP in 2012 to 8.6 percent by 2037, rather than to the 10.4 percent in the path described above. If, instead, excess cost growth for those programs equaled 2.0 percentage points starting in 2022 and continuing indefinitely, federal spending for major health care programs would grow to 11.3 percent of GDP by 2037.
The adjusted CBO forecast still clearly shows Medicare posing big problems for the federal budget. Of course, we could bet, as some liberals desire, that the recent decline in health inflation is a permanent fixture in the economy. AEI’s J.D. Kleinke warns against doing so:
What is really behind this economic normalization of health spending? What has occurred during the past decade, absent any government “overhauls” of the system? Three things: (1) medicine has slowly, cumulatively been getting better; (2) insurers have been getting smarter about benefit design and consumer behavior; and (3) health care consumers have been watching their once blank-check insurance coverage morph into tough, cost-sharing plans – with economic consequences attached to every choice.
The only bad news is that this slow, steady correction over the past decade is too slow, not nearly deep enough, and does not address the real drivers of waste in health care: the juggernaut of administrative madness that is the employer-mediated, hyper-regulated, fragmented, localized health insurance colossus – the same wreck into which the Obama Administration wants to jam another 30 million people.
Yes, Medicare still looks to be a fiscal problem and likely will continue to be thanks to President Obama’s health care reform law.