March 5, 2009

Ambitious Health Care Reform Can Lead to Lower Budget Deficits

Today, President Obama is taking another step toward achieving needed health care reform by hosting a White House summit on health care. At the summit on fiscal responsibility last week, President Obama explicitly put forward the view that the nation’s budget deficit problem is a health care problem.

As OMB Director Peter Orszag has repeatedly pointed out, the projections of enormous long-term deficits are driven almost entirely by projections of exploding private sector health care costs. If health care costs rise only due to the aging of the population, and otherwise grow at the rate of per capita income, the long-term deficit problem is very manageable.

It will be politically difficult to restrain health care costs to this extent, but this is something that almost every other country wealthy country has managed to accomplish. If the United States could reform its health care system to be as cost-efficient as any of the 30 countries with longer life expectancies than ours, we would be projecting enormous budget surpluses rather than deficits.

Healthcare Budget Deficit Graph Click here to see a larger image.
Yellow line: Baseline U.S. budget deficit projection from the non-partisan CBO.
Blue line: CBO's "Low Health Care Cost" projection (assumes that health care costs in the U.S. rise only due to the aging of the population, but otherwise stay even with per capita GDP growth)
Red line: Projected budget deficit if the U.S. had the same per person health care costs as the OECD high-income countries (all of which enjoy longer life expectancies than the U.S.)
During his election campaign, President Obama proposed a plan that centered on allowing workers and employers the option to buy into a Medicare-type public plan. This sort of system offers the opportunity to achieve substantial long-term savings that will give the country a competitive health care system.

If President Obama can push through a plan similar to what he outlined in the campaign, it will both solve the “entitlement” problem and help restore the competitiveness of U.S. manufacturing, in addition to extending coverage to the uninsured.