The CBO’s Budget Outlook: Not Good

In January, the CBO released a report titled The Budget and Economic Outlook: Fiscal Years 2010 to 2020. A summary of the findings is available on the CBO Director’s blog. Today, however, I focus on CBO’s evaluation of how changes in health care spending affect the federal budget.

“Medicaid spending (excluding stimulus funding) increased by 9 percent ($18 billion) in 2009—exceeding its 7 percent average annual growth rate of the previous 10 years—largely because higher unemployment boosted enrollment in the program. Medicare outlays (including an offset for premium payments) also rose at a faster rate than the average of the past decade, growing by 10 percent ($39 billion).“

Why did Medicare outlays increase at higher than historical averages? It is possible that physicians are cost shifting in the face of a bad economy. With more unemployed workers (and thus fewer privately insured individuals), more physicians may be willing to see Medicare patients or physicians may use supplier induced demand to increase the number of services they supply to this population. On the other hand, this could simply be explained by the fact as baby boomers retire, there are more Medicare-eligible individuals which will increase cost even if spending per capita increases at historical rates.

Additional large spending outlays last year include the American Recovery and Reinvestment Act of 2009 (ARRA) ($80 billion)–which was largest annual adjustment since 1982–and military operations in Iraq and Afghanistan ($155 billion).

In the long term, the CBO projects that debt levels will continue to rise:

“In addition, the share of the population age 65 or older will continue to expand rapidly. As a consequence, the growth of spending for Medicare, Medicaid, and Social Security will speed up from its already rapid rate…Medicare and Medicaid spending are projected to grow by 7% per year between 2011 and 2010…debt held by the public would reach 98 percent of GDP by the end of 2020, the highest level since 1946.“

The most important point the CBO makes in the report, however, is the following:

“The single greatest threat to budget stability is the growth of federal spending on health care—pushed up both by increases in the number of beneficiaries of Medicare and Medicaid (because of the aging of the population) and by growth in spending per beneficiary that outstrips growth in per capita GDP.”

Source: Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” January, 2010.

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