Changes in CBO projections of federal health spending: aging v. inflation
July 6, 2012 3 Comments
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.
- 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.