Changes in CBO projections of federal health spending: aging v. inflation

Brad Flansbaum was reading Aaron’s Carroll’s post and asking me via email about changes over time in CBO’s attribution of aging v. cost inflation as the driver of federal health care spending. It is an interesting question, but the answer doesn’t really change the fact that health care costs are the main spending side driver of federal budget unsustainability. Further, I don’t believe the relative impact of these two drivers of future health care costs necessarily implies a set of policy answers over others. Below I briefly compare the 2010 and 2012 CBO long run budget outlooks (you could do much, much more).

CBO’s long term budget outlook from June 2012 contains the following breakdown of the role of population aging v. cost inflation in explaining the growth in non-interest federal spending through 2037 (p. 15):

Focusing on health care programs (Social Security faces a purely demographic problem, while Medicare and Medicaid via the dual eligibles join the same problem with cost inflation), CBO says that population aging is responsible for between 52%-60% of the growth in federal health care spending through 2037, depending upon which budget scenario you use (extended baseline is the most optimistic scenario with federal debt-to-GDP stabilizing; the extended alternative scenario is the one where federal debt-to-GDP looks like Alpe d’huez).

Back track to the 2010 CBO long term outlook

The roughly comparable breakdown using the extended baseline (p. 11)  is for 2035, major health care programs that shows 45% of the increase in federal health spending being due to aging. That is actually quite a change from 2010 (45% of health spending growth due to aging) to 2012 (60% of health spending growth due to aging; both using extended baseline scenario). Note that the 2010 CBO report also shows a very long time horizon (to 2080; not shown in the 2012 report) and in the very very out years, cost inflation is the overwhelming driver, in large part because the demographic impact of the baby boomers will be fully felt by around 2040 or so, and the demographics from 2040 to 2080 or so get a little better with respect to workers per elderly person.

Several points:

  • Health care costs are the most important (by far) spending side problem if the goal is to ever have a federal budget that at least approaches balance. Addressing such costs by slowing their growth as compared to current projections and raising taxes collected as a percent of GDP will both be required to ever have a sustainable budget. My book has ~50,000 words on this,with around half of them focused on the next steps for health reform.
  • CBO is scoring aging of the population as more important in explaining federal health care budget growth over the 25 year window in 2012 (60% of growth) than they did in 2010 (45% of growth). This is interesting, but does not change the basic fact that health care costs are the driver of spending side reasons for an unsustainable budget.
  • I haven’t delved fully into all the details of the 2012 to the 2010 CBO reports, but do not believe there are any huge methodological changes in what they have done (let me know if you think so). Basically, I think they are just picking up the observed fact that health care cost inflation has been a bit lower than anticipated for a bit longer than anticipated during and after the great recession and that is now influencing their projections, hence aging gets more important in the 25 year time frame. This could be good news, but I remain unsure about whether the recent slowdown will continue since I am unconvinced of the reasons for the slowing.
  • Some believe that the more important aging (as compared to inflation) is in explaining the health care spending side of the problem implies that certain policy solutions are more warranted. For example, raising the Medicare age. I disagree, and a policy like that just shifts health care costs from one part of the federal budget to the other, and actually serves to raise overall health care costs because you are moving people out of the largest risk pool into a smaller one.
  • If we are going to ever have a sustainable budget, we will have to slow health care cost spending as compared to the default. The only way to do so is to spend less on health care than we are projected to do, and that can only be achieved in one of two ways (or a combination): providing less care than projected per capita, and/or reducing the amount paid for this care, also on a per capita basis. Both will be hard.

About Don Taylor
Associate Professor of Public Policy at Duke University and author of Balancing the Budget is a Progressive Priority. On twitter @donaldhtaylorjr

3 Responses to Changes in CBO projections of federal health spending: aging v. inflation

  1. Thanks for the post,

    You state …” The only way to do so is to spend less on health care than we are projected to do, and that can only be achieved in one of two ways (or a combination): providing less care than projected per capita, and/or reducing the amount paid for this care, also on a per capita basis.”

    I believe there is a third way…to improve the value of care.

    I believe that the slowing of inflation of federal health care expenditures is due to structural changes in the healthcare system, rather than the impact of the recession. There is greater focus on outcomes, transparency, Improved care…For example, patients suffering strokes and MI can leave the hospital in days rather than weeks, with significantly less disability if any. Hospital infections and other medical errors are way down. etc…

    What percentage of federal health expenditures is attributable to “waste”?
    Research conducted in 2008 by PricewaterhouseCoopers estimated that wasteful spending in the health system accounts for up to $1.2 trillion of the $2.2 trillion spent in the United States, more than half of all health spending.

    There are many ways that improved quality can impact long term cost.

    Actually, I believe that in a few years we will have a deflation of federal expenditures for health care (ACA implementation not withstanding).

    Could you comment on the role of “waste” in health care costs..
    Thanks,

    • Don Taylor says:

      I hope you are correct. If we reduce waste, or shift resources from unproductive to productive expenditures that would be good. What I wrote still holds though, because each dollar of waste today is a dollar of someone’s income. I am all for reducing waste, but it will still be hard for many reasons, not the least of which is that some profit from what we term waste.

      I really don’t know how much care provided is waste, or non productive. In terms of what makes care productive, I think of health care as improving quality of life, extending life or both…consistent with your goal of improving quality.

      • Don,

        I share your belief, as expressed in the intro to your book Balancing the Budget is a Progressive Priority, that balancing the budget is more a progressive than conservative imperative.

        As you, and many others note, we must contain health care costs. In reviewing the report of the The national commission on fiscal responsibility and reform, it appears that
        some Commission members believe that the reforms enacted as part of ACA will “bend the curve” of health spending and control long-term cost growth.” I’m a psychiatrist, not an economist or engaged in public policy, it appears to me that the specific health care related recommendations they make can achieve the goal of “Balancing the Budget”.

        In your last chapter you ask “What Will It Take for Us to Act?”

        I believe that civic engagement must play an important role to overcome the many special interests that want to maintain the status-quo… You can learn more about what we are doing to overcome these barriers at http://www.citizens4health.org/Citizens4health-Strategic-Plan

        Best,

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