The healthcare budget squeeze

  • Title:

    American Health Economy Illustrated
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    7" x 10"
  • 332 Hardcover pages
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The “super committee” faces a significant challenge in finding at least $1.2 trillion in savings over the next ten years. While AARP is engaged in a concerted effort to persuade the committee to keep its hands off Medicare, the reality is that reductions in projected health spending would be difficult to avoid if the committee is to reach its target. Here’s a long-term perspective to help understand how quickly health spending is crowding out other spending.

Tax-financed health expenditures over the past 50 years have grown faster than any other major functional area of government spending, including defense, income support, and education. Since 1960, the increase in government health spending as a percent of GDP more than exceeded the decline in defense spending’s share of the economy through 2010 (figure 5.2a). This is not to say that health spending caused national defense outlays to fall, but it is a useful reminder that every dollar spent on healthcare is a dollar that cannot be spend on any other national priority such as education, defense, or transportation.

More worrisome is that this rapid escalation in health spending shows no signs of abating in the foreseeable future. Using the most realistic estimates of Medicare growth (termed the “alternative fiscal scenario”), the Congressional Budget Office (CBO) projects that mandatory federal health spending—which includes Medicare, Medicaid, and the Children’s Health Insurance Program—will increase its share of GDP by 4.8 percentage points between 2011 and 2035. This does not even count the state share of Medicaid spending or other tax-financed health programs that are not counted as mandatory. It’s also worth noting that for most major functions of government, especially healthcare, a larger share of GDP was devoted to them in 2010 than in 1960. Consequently, government spending made up 35.9 percent of GDP in 2010, compared to only 23.4 percent in 1960. CBO projects that by 2035, total federal spending alone will account for 33.9 percent of GDP. This 50 percent increase in the amount of spending relative to the economy over just a half century has contributed to the fiscal imbalance that policy makers at all levels of government are having to address.

Of  the seven largest functional areas of federal, state, and local budgets, none grew faster than healthcare during the half-century starting in 1960. To see this more clearly, consider how many dollars were spent in these other areas for each dollar spent on healthcare. In 1950, all levels of government spent $7.76 on national defense for every dollar they spent on healthcare. By 2010, that figure had dropped to only 64 cents (figure 5.2c).

Likewise, even though income security remains the single largest component of government spending, spending for this purpose has declined considerably when measured against healthcare. In 1960, we spent $4.29 on income security per dollar of healthcare, but by 2010, this had dropped to only $1.20. The figures for education and public order and safety show a similar decline, albeit smaller in absolute magnitude.

This highlights the reason why healthcare has become such an intense focus of attention at all levels of government in recent years. In almost every state, healthcare has become either the largest or the fastest-growing component of public spending, making it increasingly difficult to finance other priorities such as education or criminal justice.

The super committee has a challenging task, but it is hard to see how it could possibly meets its spending reduction goals without including at least some reductions in health spending. It will be interesting to see whether it can accomplish this sensibly or whether instead it resorts to what one health policy expert has called “rationing by meat-ax.”

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint versions of Figure 5.2a and Figure 5.2c and Excel spreadsheet on government spending by function from 1959-2010 for data, sources, and methods.

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Christopher J.
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