By Cornelia Hall, Master of Public Policy Candidate, Harvard Kennedy School, Class of 2017
The national debt as a percentage of GDP has spiked in the last several years, rising from approximately 35% in 2007 to nearly 74% in 2015. Federal budget projections suggest that this trend will continue, with the debt nearly exceeding the size of the economy by 2040. Discussion about these predictions frequently returns to the topic of health care. Indeed, as the “baby boomer” generation retires and enrolls in Medicare, federal health care spending is expected to rise dramatically. In an NHPC plenary session, federal budget experts explored this topic and discussed possible methods of controlling the growth of health care spending in years to come.
The panelists emphasized the urgency of addressing health care spending. Maya MacGuineas, President of the Committee for a Responsible Federal Budget and the panel’s moderator, noted that the nation’s unsustainable fiscal challenges are largely driven by health care. Shai Akabas, Associate Director of Economic Policy at the Bipartisan Policy Center, echoed her statement by pointing out that 2015 was the first year in which health care spending exceeded Social Security spending. There were some caveats, however. Harry Stein, Director of Fiscal Policy at the Center for American Progress, noted that health care cost projections have fallen drastically from their pre-Affordable Care Act (ACA) levels.
Faced with this trend, the speakers generally agreed that health care cost savings will require strategic, widespread, and incremental change. Mr. Stein put the challenge succinctly, noting that health care spending depends on two factors: the number of health care beneficiaries and the expenditures per beneficiary. The nation must focus its cost savings efforts, he said, on the latter. He and his fellow panelists offered suggestions for doing so. Mr. Stein, for example, advocated for the White House to increase its support for payment reform efforts, such as “bundled payments,” an ongoing demonstration in which Medicare payments to providers are based on a defined episode of care. Ms. McGuineas agreed that health care cost savings should incorporate changes to care quality and cost control mechanisms to “save money smarter.” She noted that this approach should account for demographics, politics, and federal budget processes and should, above all, follow a long-term perspective.
Both Ms. MacGuineas and Mr. Stein also noted that attempts to slow health care spending growth should include increased tax revenue. Indeed, Donald Marron, Institute Fellow and Director of Economic Policy Initiatives at the Urban Institute, discussed the importance of taxation as a tool for health policy. He pointed to the current practice of pre-tax payment for private health insurance, which amounts to approximately $200-$300 billion of untapped annual revenue. Mr. Marron noted that, with implementation of the so-called “Cadillac” tax on high-cost health plans — an important source of revenue included in the ACA — delayed until 2020, changes to the pre-tax health insurance system might surface as a potential factor in health care spending control efforts.
Not all panelists agreed on the role of taxes, however. Douglas Holtz-Eakin, President of the American Action Forum, former CBO Director, and former Chief Economist of President George W. Bush’s Council of Economic Advisers, explained that tax increases are not the answer to high health care spending. Recognizing the increasing national debt, he advocated instead for entitlement reform to Medicare. He explained that, not only is the baby boomer generation aging into Medicare, but the program is also not serving its beneficiaries well, as it operates with a $300 billion annual shortfall. Mr. Holtz-Eakin thus advocated for White House leadership on the issue of entitlement reform and noted that he expects the issue to arise in this year’s general presidential election.
Considering her fellow panelists’ perspectives, Ms. MacGuineas took a moment at the end of the discussion to recognize the big picture. She noted that there is no “silver bullet” or simple solution to health care spending, as there may be for the budget challenges of Social Security. She added that there is also no right answer regarding revenue strategy. Ultimately, the budget is about tradeoffs, she said, but it is a crucial undertaking.