Health Care Spending

POSSIBLE ALTERNATIVES TO THE MEDICARE TRUSTEES’ LONG-TERM
PROJECTIONS OF HEALTH SPENDING
Jason D. Brown
Ralph M. Monaco
U.S. Department of the Treasury, Office of Economic Policy
Technical Working Paper1

It is basically critical of the Trustees' use of the GDP+1 formula(projected health care spending growth will exceed GDP growth by One percent ad infinitum).

Because the assumed rate of health spending growth is higher than GDP growth, the Technical Panel projected that National Health Expenditures (NHE) would grow to consume 38 percent of GDP by 2075. According to our calculations here, at a growth rate of GDP+1 (i.e., 2.6 percent), NHE would consume 48 percent of GDP by 2078, more than 80 percent by 2130, and more than 100 percent of the economy’s resources by 2154. 2 While in reality NHE will never plausibly exceed GDP, the Technical Panel emphasized that these projections are not predictions; rather, the purpose of Trustees’ Report projections is to illustrate the magnitude of the Medicare financing problem in the absence of any reforms

projections should take account of the substantial pressures that increased health
spending would put on the private sector to invoke private sector policies to reduce its
health care expenditures. Specifically, if the baseline historical growth rate of both
public and private health care expenditure were to extend into the future, then the growth
of private health spending would crowd out an increasing share of private nonhealth
spending. The threat of this crowd-out would cause individuals and private institutions
acting on their behalf to adopt measures curtailing the growth of private health spending.
It is likely that such measures would also crimp federal health care spending, as the rate
of public health spending growth, absent policy changes, tends to move with the rate of
private health spending growth through an equilibrium of the standard of care. It is
important to note that the goal of incorporating some notion of a private sector response
to rising health spending is to improve the projections of the magnitude of the Medicare
financing problem, not to predict how the problem will be solved.

Because private health expenditures are assumed to grow faster than nominal GDP under all the scenarios, growth in private nonhealth spending is increasingly slowed by growth in health spending. Again, once real per capita nonhealth spending slows to a certain small but positive rate (0.75 percent, 1.00 percent, 1.25 percent, 1.50 percent), private nonhealth spending growth is fixed at that rate. Both public and private health spending growth, which have historically tracked each other, are assumed to slow to maintain the constant nonhealth spending rate. Once the threshold is reached, health spending growth slows to accommodate that level of nonhealth spending growth. Obviously, assuming a higher growth rate of health spending accelerates the point at which the threshold is hit.

This Author basically agrees with the Paper, though he has a serious contention: the Paper assumes the effect of medical insurance on health spending growth will stop in the long-run, as most health care is covered currently by insurance. They do not perceive the Countercyclical effect of medical insurance, being the preliminary means through which nonhealth spending growth will limit health spending growth. It is already being seen with high Deductibles and large CoPayments to restrict Access.

The Technical Report 2000, the Trustees' Report 2004, and the authors of this Paper all assume constant, uninterrupted growth in health spending. They all refuse to identify the shrinking population who can afford private health care expenditures, as All whose Income cannot match the growth of health care costs. The high Deductibles and CoPayments dictate the later Group cannot even afford effective private health insurance. They also refuse to acknowledge rising health care spending is dependent upon an aging Population--a dropping Mean age will reverse health care spending. Health Care spending is also losing 'Bang for the Buck', where incremental additions bring increasing less value. This will in the long-run reduce health care spending, as private and Public Insurers restrict incremental advances, leading to reductions in Care Population numbers.

Medicare and Medicaid remain insolvent, though less insolvent than imagined because of demographic and the aforementioned nonhealth spending critical. Health Care spending growth should be less than GDP growth before 2020. This in no way diminishes the damage of a projected $8 trillion shortfall in Medicare and Medicaid funding. lgl