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Post-Acute and Healthcare News and Topics

Deficits and Health Care: Economics Redux

I know this is supposed to be a blog about healthcare issues, primarily that which falls in the post-acute, long-term care and senior housing world but some stuff in the news right now is just too hard to ignore.  After all, healthcare reform does affect long-term care and post-acute care directly and economics, especially the content in the news, affects all of health care and all of us (especially those of us who are tax payers).  In short, I ask for a bit of indulgence as I take apart the economic news of the “current” and translate the same into health policy.

According to the White House and the Congressional Budget Office, the ten year deficit forecast is worse than originally predicted – now pegged at $9 trillion and some change.  As a trillion is a difficult number to comprehend ($1,000,000,000,000 x 9 equals the projected deficit) think about it this way: Nine trillion one dollar bills set end to end would reach from the Earth to Saturn (821 million miles or 1.3 billion kilometers).  Essentially, in layman’s terms the government is projecting to spend $9 trillion more than it take in over the next ten years.

Now of course, there is some good news and some bad news attached to this estimate.  The good news is that if the economy recovers and unemployment decreases and business sales increase, revenue in the form of taxes paid will increase.  Assuming for a moment (a leap of faith is required here) that government spending holds at the same pace as present, the projected deficit will fall marginally lower due to increased revenues.  The bad news is that it may be impossible in the short-run for the economy to fully recover on its own without additional unfunded (deficit) government spending.  If such is the case and further stimulus spending is required, the $9 trillion mark may become a distant point in the rear-view mirror (and in this mirror, objects are definitely not closer than they appear).

To come to the point for this purpose, it is important to factor in the deficit disussion the role that healthcare plays.  The President and many Democratic leaders, Administration officials and Administration friendly economists have indicated that health care is a significant piece of this projected deficit.  Their argument is that without some form of reform (particularly the reform proposed), health care costs will continue to skyrocket and such skyrocketing will only deepen the deficit.  Without a doubt, there is truth to this argument although the question is “how much truth”.

To gain a clearer understanding of the role healthcare may or may not play in the current deficit news requires a fundamental understanding of what data is in the current projection.  As the deficit news is predicated on a projection methodology, certain assumptions are key.  The normal assumptions about revenue and expenditures play a significant part but in this case, some of these assumptions include programs not yet in-place.  For example, the projected deficit already assumes $622 billion in health care savings.  In addition, the proposed higher tax revenues generated from reduced deductions and higher tax rates from the wealthy (as included in the health reform proposals) are also included – $275 billion and $580 billion respectively.  There is also an assumption that the yet to be enacted cap-and-trade legislation becomes law (as proposed with no real modifications) and produces $627 billion in new revenue.  Assuming, as is likely the case, that health reform in its present state is on shaky ground and cap-and-trade on even shakier ground, the revenue side of the deficit calculation just shrunk by $1 trillion dollars.  Recalculating the deficit projection without these two pieces of “fragile” legislation nets a $10 trillion amount.

To be fair to the deficit calculators, removing the savings from health care reform due to the unlikely nature of the legislation passing also requires removing the cost.  Interestingly enough, the cost estimates are as “funky” as the revenue estimates.  Using the House plan (the President’s desired option), the expense associated with reform is pegged at $1 trillion over 10 years (according to the Congressional Budget Office).  The CBO and the Democrats have acknowledged that in this same period, the costs of reform produce a deficit of $239 billion, largely attributable to increased physician payments under Medicare.  This is the base case and the assumptions used in the deficit projections equalling the $9 trillion amount.

Where the above estimates get “funky” is when they are viewed in context with the actual legislation.  In the House version, revenues are collected immediately (2011) but the benefits don’t begin until 2013 with full implementation targeted for 2015.  According to a House Ways and Means analysis (rarely discussed), the actual deficit ten years post full implementation (2016) is $760 billion.  A simpler conclusion by various non-partisan and independent economists is that the legislation, net of all projected savings and offsets, adds $65 billion per year to the deficit post full implementation.

So, as I have heard argued, what’s a trillion compared to $9 or $10 trillion?  After all, health reform only adds 10% to the deficit total, an amount that would be very palatable if it were the only component of the deficit.  Alas, therein lies the problem or the need to deal with the economics, redux.  The Federal government directly, only pays for a portion of total health spending in the U.S. today.  In 2007, Medicare and Medicaid (the two giants) accounted for 4 percent of GDP.  Total health spending in the U.S. was 16% of GDP at the end of 2007; 12% spent wholly outside of Medicare and Medicaid.  In dollars, Federal spending accounts for 26% of all spending on health care in the U.S.  What this fundamentally means as far as deficits are concerned is that the only dollars taken into account in the $9 trillion calculation are federal dollars or the amount the government actually spends – not the other three-quarters spent outside of the government.

Arguably, Medicare and Medicaid are two inefficient and poorly funded entitlement programs and as such, sizable contributors to the Federal budget and projections of deficits with our without reform.  Both programs, as I have argued, need significant reform but again, at what price and to what end.  According to the CBO, in twenty more years, Federal spending on healthcare will reach 9% of GDP and 30% of total spending on healthcare, assuming both programs remain unchanged.  All tolled today, the funding deficits under Social Security and Medicare are at such levels that just to “make whole” the revenue versus expense equation, current tax rates would have to double.  Critical to note is that the health reform legislation desired by the President and residing in HR 3200 does substantially nothing to reform Medicare and Medicaid while adding nearly $1 trillion to the deficit.  In the simplest of terms, the piece of the pie that is and would be Federal spending for health care in the United States would increase dramatically under the present reform proposals and by logic, the piece of the deficit related to health care spending.

Abandoning economics and numbers for a minute and relying on simple logic, it seems inconceivable that the deficit becomes worse without health reform which only adds to the deficit and does nothing to change the underlying Federal programs that are by all analyses, significantly underfunded to begin with.  Medicare and Social Security in 2008 represented a $455 billion deficit to the government; revenues versus expenses.  In present dollars, the Office of Actuaries has indicated that at “present law”, Medicare and Social Security are $46 trillion under-funded over the next 75 years.  Using the most generous of assumptions as provided in HR 3200 of program savings ($622 billion) over 10 years and a deficit increase of $239 billion, the unfunded liability (and therefore the deficit attributable to health care) grows larger, not smaller.  Simple logic says that there is no relationship whatsoever between health reform and deficit reduction other than a negative relationship. 

There is no fundamental economic argument I can understand that concludes with increasing the amount of Federal unfunded spending on healthcare thereby creating an increasing deficit on top of existing running deficits, somehow produces a decrease in the federal deficit.  Economics in this case redux is simple: Reform the Federal side of health care spending via reforming Medicare and Medicaid (that which already contributes substantially to the deficit) and the deficit related to healthcare will decrease.


August 26, 2009 - Posted by | Policy and Politics - Federal | , , , , ,

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