July 14, 2016
The Washington Post reported on new projections on national health care spending by the Centers for Medicare and Medicaid Services (CMS). The projections are that health care costs will outpace the growth of the economy, rising from the current 17 percent of GDP to 20 percent by 2025. It then provides readers with a warning from Katherine Hempstead, a researcher at the Robert Wood Johnson Foundation:
“Even under the rather optimistic assumption that health care spending grow no more quickly than the economy itself; we will, before long, be forced to choose between an unpleasant combination of significant tax increases and/or cuts in defense and non-health spending.”
(I believe Hempstead is referring to age-adjusted spending. Per capita spending is virtually certain to rise relative to per capita income, due to population aging.)
There are three points worth noting on these projections. First, the CMS projections have been notoriously inaccurate in the past. In the 1990s, health care spending was projected to be more than 25 percent of GDP by 2030. This doesn’t mean the most recent projections will be wrong, but people should know they are highly uncertain.
The second point is that U.S. costs are already hugely out of line with costs in other wealthy countries with no obvious benefits in terms of outcomes. We currently pay more than twice as much per person for our health care as people in other wealthy countries yet rank near the bottom in life expectancy.
As our costs grow further relative to costs in other countries, it will require a strengthening of protectionist measures to sustain this growing gap. In other words, there are huge potential savings from people receiving health care in other countries. (Also, there would be enormous savings from allowing adequately trained foreign doctors to practice in the United States.) If the protectionists ever lose their control of national policy we could see a sharp drop in costs from opening up to trade in health care services. (The potential savings would more than an order of magnitude larger than even the most optimistic projections of gains from the Trans-Pacific Partnership.)
The third point is that the U.S. economy has suffered from a shortfall in demand ever since the collapse of the housing bubble. If this “secular stagnation” continues, then we will not need tax increases and/or spending cuts to pay for health care. If we face a shortfall in demand then we can simply finance additional health care spending with deficits. In the context of an underemployed economy, this will boost growth and create jobs.
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