The Congressional Budget Office provides some gloomy news on the fiscal health of the federal government in their recent 2016 Long Term Budget Outlook. They state:
If current laws governing taxes and spending did not change, the United States would face steadily increasing federal budget deficits and debt over the next 30 years, according to projections by the Congressional Budget Office. Federal debt held by the public, which was equal to 39 percent of gross domestic product (GDP) at the end of fiscal year 2008, has already risen to 75 percent of GDP in the wake of a financial crisis and a recession. In CBO’s projections, that debt rises to 86 percent of GDP in 2026 and to 141 percent in 2046—exceeding the historical peak of 106 percent that occurred just after World War II.
CBO projects that there are three key factors affecting future debt burdens and the first two relate to the impending retirement of baby boomers. The aging of baby boomers will hit the federal government in both paying for their retirement (Social Security) and their health care (Medicare). Interest on the current debt is the third component expected to drive increases in long run federal debt.
Let’s take a look at the CBO’s health care expenditure projections. Note that excess cost growth is the change in per capita health spending above and beyond economic growth. For instance, if excess cost growth was 1%, this would mean that average per capita health spending would grow by 1 percentage point more than increases in GDP per capita over this time period.
net federal spending for those programs[i.e., Medicare, Medicaid, CHIP and ACA subsidies] grows from an estimated 5.5 percent of GDP in 2016 to 8.9 percent in 2046: Net spending for Medicare amounts to 5.7 percent of GDP that year, and spending on Medicaid and CHIP, combined with outlays for subsidies for insurance purchased through the marketplaces and related spending, equals 3.1 percent….Aging accounts for….roughly 60 percent of the…[increase in federal health spending]. Excess cost growth accounts for the rest…
How does CBO come up with these projections? First they look to demographers and actuaries to see how the age composition will shift over the coming decades. Next, the predict changes in spending per capita, using the excess cost growth approach. Specifically, CBO assumes:
For Medicare, that average [excess cost growth] rate is 0.9 percent; for Medicaid, it is 0.7 percent; and for private health insurance premiums, it is about 2 percent. After 2027, the excess cost growth rate of each of those three categories moves linearly, by the same fraction of a percentage point each year, from that category-specific rate to a rate of 1.0 percent in 2046
How does CBO recommend controlling cost in Medicare? They make the following suggestions:
- Increased cost sharing
- Decrease reimbursement rates to providers
- Provide incentives to reduce readmissions, hospital acquired infections, and other downstream costs
- Innovative pricing models (likely bundled payments, value-based payments, etc.)
- Independent Payment Advisory Board (IPAB) could implement reforms if Medicare spending exceeds certain thresholds.