Healthcare and the Budget Forecast: Don’t Think of the Children

Michael Stephens | March 9, 2012

Medicare cost growth has been slowing down, and according to research published in the New England Journal of Medicine there may be more going on here than just a temporary reaction to the recession.  This is just one analysis of course, but if it pans out, if it marks the beginning of a sustained trend, the implications for the budget debates would be huge.

If Medicare cost growth tapers off, this would address the most pressing issue for those who are concerned (in good faith at least) about the long-term US budget picture.  “Deficit doves,” who are careful to state that we need to increase deficits in the short-term to deal with the recession’s aftermath, will tell you that in the long run the problem is not spending in general, or entitlements (the long-term gap in Social Security funding is estimated to be about 0.6 percent of GDP), or even demographics (the aging of the population will inevitably mean more spending on programs for the elderly, but this trend levels off after a certain period; it’s predictable and manageable).  The very core of their case for long-term debt anxiety is the belief that healthcare costs (and by extension Medicare costs) will rise much faster than GDP for the foreseeable future.

But this means that a large part of the debate has been driven by what we think will happen to healthcare costs decades and decades into the future.  That’s not to say that we should simply wave away problems if they’re based on long-term projections, but we do need to keep it all in perspective.  In this vein, Karl Smith picks up the story on Medicare costs and delivers a bracing inoculation against the “think of the children!” disease that afflicts so many policymakers:

Suppose that this trend were to continue and that per enrollee costs actually shrank as fraction of potential GDP. In that case the long term budget outlook is pretty good.

Now imagine that you withheld a payroll tax cut or food stamp relief or any other program on the basis of fear about long term budgets. Depending on your macro estimates somewhere between millions and hundreds of millions of people suffered for this.

What did you get in return for their suffering?

Absolutely nothing. Nothing. Nothing.

Every time you ask a real living person to suffer for some future goal you have to know that you are betting their well-being on your being right about the future.

And if you’re of a more owlish persuasion, this story about healthcare costs is still a big deal—though it will be a story that’s more about real resources than federal budgets.  “Rising health care costs,” as Randall Wray put it, “are a burden on every sector of our economy. …the situation is unsustainable, with health care costs growing at a 6%-9% annual rate (depending on sector)—much faster than GDP. Simple math shows that health care will amount to 100% of GDP before long at that pace.”  (For Wray’s take on healthcare reform, see here.)


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