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Old problem

11 March 2013 By Daniel Indiviglio

Don’t blame medical costs for the rise in America’s debt. Washington agonizes over runaway healthcare spending, but that trend has been changing. Over the longer term, the federal government’s bigger problem will stem from the number of people needing treatment.

In 2012, healthcare expenditures grew by about 4 percent for the fourth straight year, according to health systems research firm Altarum. That’s pretty much in line with the three-year average rate of nominal GDP growth, a common measure of economic expansion. The new trend marks a stark contrast to the past few decades. Between 2000 and 2006, healthcare costs expanded 7.6 percent annually while nominal GDP growth averaged 5.3 percent.

The Congressional Budget Office has already been tweaking its estimates based on this recent trend. Its budget projections in January cut the cost of Medicare and Medicaid in 2020 by $200 billion. That’ll help trim expected deficits, but even eliminating all excess cost growth from higher prices and an increase in medical procedures wouldn’t come close to solving the nation’s fiscal woes.

Breakingviews estimates that debt-to-GDP will rise from 73 percent today to 138 percent in 2038, using the CBO’s January projections and current policy. The CBO’s long-term outlook published last June says that excess cost growth will account for 40 percent of the new government healthcare spending over the next 25 years. Eliminating that entirely only takes long-term debt-to-GDP down to 126 percent.

The graver problem is demographics. That’s responsible for 60 percent of coming healthcare expenditure growth, according to the CBO. This alone will push Uncle Sam’s medical bill to 7.9 percent of GDP in 25 years’ time from 5.4 percent now. Factor that into the ballooning deficit and then assume interest rates start rising later this decade and the nation’s annual borrowing costs could rise from 1.4 percent of GDP to 5.3 percent in 2038, according to a Breakingviews calculation.

That doesn’t undermine the positive impact on the U.S. economy of healthcare cost growth slowing down. Americans will have more money either to buy other goods and services or to invest. But even this best-case scenario isn’t enough to steer the country off the path to bigger deficits.

 

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