Health Costs and the Federal Budget

May 28, 2010

On Wednesday I spoke at a conference on the health care system hosted by the Institute of Medicine. My presentation dealt with health care costs and the federal budget. The central challenge is straightforward and stark: The rising costs of health care will put tremendous pressure on the federal budget during the next few decades and beyond.

In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure. In fact, CBO estimated that the health legislation will increase the federal budgetary commitment to health care (which CBO defines as the sum of net federal outlays for health programs and tax preferences for health care) by nearly $400 billion during the 2010-2019 period. Looking further ahead, CBO estimated that the legislation would reduce the federal budgetary commitment to health care in the following decade—if the provisions of the legislation remain unchanged throughout that entire period. CBO also estimated that the legislation will reduce budget deficits by about $140 billion during the 2010-2019 period and by an amount in a broad range around one-half percent of gross domestic product (GDP) during the following decade—again, under the assumption that the legislation remains in force as enacted.

The projected reductions in budget deficits and in the federal budgetary commitment to health care during the decade beyond the 10-year budget window are steps in the direction of sustainable fiscal policy. However, they are small steps relative to the length of the journey that will be needed to achieve sustainability. If the tax cuts enacted in 2001 and 2003 are extended, the alternative minimum tax is indexed for inflation, and no other changes are made to current laws regarding taxes and spending, the budget deficit in 2020 would be about 6 percent of GDP and rising. Because federal health care programs make up a large share of the federal budget, putting that budget on a sustainable path would almost certainly require a significant reduction in the growth of federal spending on health care relative to the amounts projected under current law (including this year’s health legislation).

In considering the opportunities for achieving that reduction in spending growth, there are grounds for both optimism and pessimism. On the upside, there is considerable agreement that a substantial share of current spending on health care contributes little if anything to people’s health, and providers and health analysts are making significant efforts to make the health system more efficient. On the downside, it is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system; that is, it is not clear what specific policies would translate the potential for significant cost savings into reality. Moreover, efforts to reduce costs substantially would increase the risk that people would not get some health care they need or would like to receive.