The hidden costs of health entitlements are growing at triple the rate of health entitlements

Call me a broken record, but the current spending path created by Obamacare is unsustainable. And it's even more unsustainable once we take into account the share of interest payments on the national debt that can be attributed to health entitlements. It turns out that even after accounting for growth in the economy, these hidden costs are growing three times faster than health entitlements themselves. Put another way, within 30 years, failure to account for these hidden costs will understate the true burden of health entitlements by more than one quarter.

Imagine a family trying to get their household budget under control that forgot to take into account the interest paid on their home mortgage. They'd have a pretty difficult time keeping their spending under control. If we want to understand the true burden of health entitlements, we need to account for not only what we spent on them directly, but also the fair share of net interest payments on the national debt attributable to these same entitlements.

This week's post was inspired by a recent piece by Steve Conover, who tried to define a "sustainable" level of federal debt. His point was that policymakers should not be preoccupied with the absolute level of national debt, but instead with our ability to sustain whatever level of debt we have. That is best measured using what he calls the "interest bite," defined as net interest as a percentage of federal tax receipts. He points out that the interest bite is only half the level of 20 years ago despite a rise in the absolute size of the debt. Sadly, the past is not prologue. Not even close.

Being curious, I wondered what the interest bite looked like in the future as rising health entitlements continue to outpace growth in the economy. Using official government figures from the Congressional Budget Office, I learned that the picture isn't pretty under current policy.  Within a decade, the interest bite doubles and within another decade it has doubled again.  Within three decades, we'll be spending 60 percent of federal revenues just to pay interest on the national debt! Picture a family struggling to bankroll a mortgage that absorbs 60 cents out of every dollar coming in.

Skeptics will point out that if we rigorously adhere to current law, everything will be fine. In that case, the CBO figures show that we'll eventually reach a point 60 years from now in which the U.S. becomes a creditor nation. That is, we will be so awash in surplus revenues that it can start collecting interest on money it lends out rather than vice-versa. Unfortunately, current law requires:

  • Medicare to slash physician fees by 25 percent next January.
  • Obamacare-required cuts to physician fees so severe that by 2030, Medicare will be paying doctors 60 percent less than private health insurance plans.
  • Obamacare-mandated reductions in payments to hospitals so drastic that hospital prices for both Medicare and Medicaid will be less than half those paid by private health insurers by the year 2040.

Does anyone seriously think Congress has the political will to withstand the howls of protest from doctors and hospitals that will be heard in every single congressional district across the country? And even if we imagined policymakers had the political will to impose these cuts, would they really be a good idea? The Medicare actuary has estimated that under the draconian cuts contemplated under Obamacare, 15 percent of Part A providers (hospitals, nursing homes and home health agencies) will be in the red by 2019; this will climb to 25 percent by 2030 and soar to 40 percent by 2050. Such cuts portend huge problems in access for Medicare and Medicaid patients, either because providers refuse to treat such patients (a common occurrence for Medicaid patients already) or because facilities literally have been driven to bankruptcy.

But wait! There's more bad news (honestly, my goal is not to be the guy who sees a dark cloud behind every silver lining). I've stated repeatedly that according to the CBO's latest long-range budget projections, literally all of the growth in the federal government relative to the economy over the next 75 years will result from increased spending on health entitlements. But all my calculations have ignored interest payments. Why? Because under the alternative fiscal scenario, CBO cannot project the magnitude of such payments since the national debt at that point will have entered uncharted waters (i.e., exceeding 250 percent of GDP). Essentially, its model cannot compute in that range.

So I did some simple calculations to ascertain what share of the federal debt could reasonably be attributed to health entitlements. I then used these shares to calculate what fraction of net interest payments each year were health entitlement-related. For those who might think I have been alarmist, all my previous calculations about the burden of health entitlements actually have been understated. Admittedly, in the near term, the amount of understatement is quite minor, but by the year 2042, the health entitlement share of GDP is 31 percent higher when interest costs are taken into account than when they are not.

Over this period, raw spending on health entitlements will grow 2.4 percent a year faster than the economy. But this "excess growth" differential rises to 3.1 percent a year once interest payments are taken into account (i.e., 28 percent faster). Put a different way, the excess growth in health-related interest payments on the national debt is three times as fast as excess growth in health entitlements!

In short, when people talk about the "slowdown" in health spending, keep in mind that a) the "hidden costs" of health entitlements more than make up for the observed slowdown; and b) the slowdown itself is likely to be temporary.

I very much agree with the Democrat, an independent and a Republican who have astutely observed:

"generational theft needs to be arrested."

When will this president finally release a credible plan for slowing this entitlements train down?

 

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Christopher J.
Conover

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