Even Paid-For Health Care Plan Would Entrench Budget Woes

By JED GRAHAM
INVESTOR'S BUSINESS DAILY | Posted Monday, June 29, 2009

As analysts project $10 trillion in deficits this decade, President Obama's main path to fiscal fitness is to curb federal health care outlays long term.

Obama's public insistence on budget-neutral reform has put Washington's focus on the difficult job of paying for an expansion of health care coverage. Budget watchdog groups generally approve of this pledge to fully pay for a new health care entitlement, though it's not at all clear that Congress will deliver such a plan.

But using health care cost cuts to finance a big spending expansion — rather than reduce the deficit — may entrench near-term budget problems.

In 2019, with Medicare and Medicaid consuming an extra 2.3% of GDP above 2008 levels, the Congressional Budget Office projects a budget deficit of 5.5% of GDP under the White House plan.

Slowing the growth of these health care entitlements could hold down the deficit, but the administration wants to use projected Medicare savings to pay for near-universal health care.

"In light of the unsustainable path of the federal budget under current law, using savings to finance new programs instead of reducing the deficit would necessitate even stronger policy actions in other areas of the budget," CBO director Douglas Elmendorf wrote this month.

CBO's new Long-Term Budget Outlook says that waiting to address the long-term deficit until 2020 could hike the eventual cost by as much as 20%, or 1.6% of GDP.

Donald Marron, who served on President Bush's Council of Economic Advisers and later as acting CBO director, said that policymakers are attempting to pick what amounts to the "low-hanging fruit" of potential budget savings. Using those "to undertake a major new federal spending program makes it that much harder to address the deficit issue."

Obama's Council of Economic Advisers raised hope early this month that slowing health care cost growth — bending the curve — could help near-term deficits.

But the analysis assumed that health care reform would be paid for "by budgetary savings above and beyond the 'curve benders.' "

Ten days later, the White House released cost-saving measures that appear more tied to just bending the curve. Among them were $75 billion in savings from "better prices for Medicare Part D drugs" and $110 billion from reducing Medicare payments to reflect productivity gains.

Thus, health care savings this decade may be limited — even if reform manages to lower costs.

"Adding 50 million people to the insurance rolls is hard enough without reducing the deficit," said Len Nichols, director of health policy at the New America Foundation.

While Nichols believes bending the cost curve will produce real savings, he sees the moral issue too important "to hold health care reform hostage" to deficit reduction.

CBO notes that savings from trimming federal health care spending growth by 1% a year "would roughly match the cost of an expansion of insurance coverage by the end of the decade and would exceed that cost in the next decade."

Still, depending on how health reform is paid for, expanding coverage may eat into budget savings beyond the first decade.

Elmendorf noted that the biggest cost-saver proposed by the White House — reducing payments to private plans under Medicare Advantage — wouldn't keep pace with the growth in health care costs.

While such issues relate to the timing of potential health care savings, new analyses put into perspective the administration's focus on health care reform as the answer to fixing long-term budget woes.

CBO notes that just 32% of the growth in entitlement costs over the next 25 years is directly tied to health care cost growth. Meanwhile, 56% is tied to aging and 11% to the interaction between these two factors.

"Even if the administration's health reforms were successful beyond their already-optimistic aspirations, if they don't confront the true drivers of entitlement costs it's unlikely they'll fix the problem," wrote American Enterprise Institute resident scholar Andrew Biggs at his blog, Notes on Social Security Reform.

Public debt is on a path to surpass its World War II-induced record of 108.6% of GDP by 2025, Brookings Institution economist William Gale and University of California at Berkeley professor Alan Auerbach conclude in a new paper.

"Even if rising health care costs are an important component of the long-term problem, they are not necessarily 'the' cause of the fiscal gap," they wrote.

They note that per capita health care costs, now rising 2.5% a year, would have to fall 0.5% for 75 years to keep debt stable as a share of GDP.