The rate of growth in health spending increased in 2014 and 2015 but has recently trended downward, perhaps toward the record low levels experienced from 2009 through 2013. That’s the good news. The bad news is that even these record low levels are not sustainable in the long run without sacrifices that will cause extreme pain across the political-economic spectrum.
The Current Path of National Health Spending
In the four years immediately following the recession (2010 through 2013), health spending grew at a historically low average annual rate of 3.6 percent, about the same as gross domestic product (GDP). This era was interrupted in 2014 with the advent of expanded coverage under the Affordable Care Act (ACA)—the newly insured used more care than before—and the introduction of expensive new drugs for hepatitis C. Health spending jumped to 5.3 percent growth in 2014 and an estimated 5.8 percent in 2015.
Coverage expansion has begun to level off in 2016 and spending on hepatitis C drugs is on the decline. Thus, it is not surprising that preliminary estimates show health spending growth slowing to 4.7 percent for the first quarter of 2016. It is reasonable to expect health spending growth for all of 2016 to fall somewhere between 4 and 5 percent, with the possibility of approaching 4 percent growth in 2017 if economy-wide inflation remains low and the growth in spending on prescription drugs comes back to earth.
This would put health spending on a path close to GDP+0 until the next recession, which is due to arrive within the next few years. (The current expansion is already the fourth longest in U.S. history.) Recessions lower GDP growth much more than they lower health spending growth and thus raise the average differential between GDP growth and health spending growth above what it is between recessions. While there is much uncertainty, the long-term path of health spending is likely higher than GDP+0 but (hopefully) less than GDP+1.
This would be historically slow growth — but is it sustainable?
An Approach to Determining the Sustainability of Health Spending Growth
Four years ago I presented an approach to estimating sustainable growth in health spending. It was based on the federal government’s commitment, under the ACA, to make affordable and adequate health insurance available by expanding Medicaid to all low-income individuals and subsidizing the purchase of private insurance for those not eligible for Medicaid but unable to afford the full cost of insurance.
Prior to the ACA, the sustainable rate of growth in health spending would have to be analyzed separately for Medicare, Medicaid, and private insurers. But under the ACA, a sustainable rate of growth in health spending can be defined as one that allows the government to live up to its commitment to affordable and adequate insurance for (mostly) everyone. Rates higher than this are unsustainable in the sense that they would drive federal health spending to intolerable levels, resulting in abandonment of the ACA commitment and a return to ever-increasing numbers of uninsured and underinsured.
The Role of the Political Process
The level of federal health spending that would be “tolerable” in the long run reflects societal choices in areas that are highly polarized politically. As with the earlier analyses, these choices are illustrated using 2035 to represent the long run. The amount available for federal spending on health will depend upon what the public is willing to provide in tax revenues, as well as the portion of these revenues to be set aside for federal spending on Social Security, national defense, other non-health care items (such as safety-net programs, food, housing, education, transportation), and interest on the national debt. The framework allows continuing budget deficits as long as they are below the level required to stabilize national debt as a share of GDP.
The rate of health spending that is sustainable involves tradeoffs and choices made through the political process. All else equal, if we are willing to pay more in taxes we can sustain higher health spending growth. Similarly, if we are willing to reduce spending on national defense and/or Social Security and other non-health programs, we can sustain higher growth in health spending.
The Triangle of Painful Choices
These tradeoffs are illustrated in the Triangle of Painful Choices (see Exhibit 1), which displays health spending growth rates consistent with an adequately balanced budget in 2035. (The technical details are here.) Tax revenues are shown on the horizontal axis. Spending on national defense and other non-health programs (excluding Social Security) is shown on the vertical axis. Both are expressed as a percentage of GDP.
Spending on Social Security is assumed to be 6.3 percent of GDP (as projected for 2035 by the Congressional Budget Office [CBO]), and an additional 0.5 percent of GDP is set aside to stabilize the debt to GDP ratio (Note 1). The diagonal lines represent different rates of growth in national health spending expressed relative to GDP. (For example, “0” represents growth of GDP+0 (Note 2))
The colored triangle represents the area in which tax revenues are historically high, defense and other non-health spending is historically low, and excess growth in health spending is historically low (all relative to historical 10-year moving averages (Note 3)). Points within the triangle will be painful to virtually everyone across the political spectrum, but points outside are worse — in my view, either infeasible or unthinkable.
Consider point A where tax revenues are at a historical high and defense and other non-health spending are historically low. This point is already painful to those wishing for lower taxes, as well as those who feel that national defense and/or infrastructure and social programs are already underfunded. Yet even this uncomfortable option requires an infeasibly low rate of growth in health spending of GDP-4! Moving to point C brings health spending to a feasible (though historically low) growth rate of GDP+1 while restraining taxes from exceeding their historical high. However, spending on defense and other non-health items falls to less than half of its historical low, rather unthinkable in a world with wars, terrorism, poverty, and periodic recessions (Note 4).
Moving to point B keeps health spending growth at a feasible GDP+1 and increases spending on defense and other non-health items back to their historical low levels. However, tax revenues rise to more than 23 percent of GDP — about 25 percent above the previous high of 18.3 percent of GDP.
Exhibit 1: Triangle of Painful Choices, April 2016 Edition
Notes: This chart depicts conditions for an adequately balanced budget in 2035 starting from a 2017 base year. Taxes and defense and other non-health spending are expressed as a percentage of GDP. All scenarios include spending on Social Security of 6.3 percent of GDP and a primary budget surplus of 0.5 percent of GDP. Excess growth is measured relative to GDP growth. The colored triangle represents the area in which tax revenues are historically high, defense and other non-health spending is historically low, and excess growth in health spending is historically low, all relative to historical 10-year moving averages.
Is Health Spending on a Long-Run Sustainable Path?
Health spending appears to be on a path somewhere between GDP+0 and GDP+1, depending upon various factors including the timing and severity of future recessions. Suppose we optimistically assume a path of GDP+0. For even this rate to be sustainable in the long run, here are some options derived from the Triangle (expressed as percent changes in GDP shares (Note 5)):
- raise taxes by 4 percent (relative to their historic high) and cut spending on defense and other non-health by 35 percent (relative to their historic low);
- raise taxes by 9 percent and cut defense and other non-health by 24 percent;
- raise taxes by 15 percent and cut defense and other non-health by 12 percent;
- raise taxes by 20 percent and keep spending on defense and other non-health at their historic lows.
These choices, or other intermediaries along the GDP+0 diagonal, could never be agreed on today. There is no appetite for increasing tax revenues, let alone by the 20 percent required to keep defense and other non-health spending at their historic low levels. Planning for a national defense budget below record-low levels seems at odds with today’s security concerns. And significant cuts to other non-health spending would ignore our aging infrastructure, as well as our need to invest in early childhood education and other research and social programs that could have a bigger impact on population wellbeing than health care.
If none of these choices is acceptable (and they are not!), then we must conclude that GDP+0, low as it is, is not sustainable. But is it feasible to drive health spending below GDP+0? If we could reduce health spending to GDP-1 growth, we would reduce the health spending share of GDP to 15.5 percent in 2035 from its current figure of about 18 percent. This may appear feasible when compared to the share of GDP spent on health by other countries, but we have no consensus means to do this. And even at this level of health spending growth, we would be faced with the need to raise taxes and/or cut spending on defense and other non-health programs.
What Must Happen Will Happen
One thing is certain: if we are to be on track for a long-term stable debt-to-GDP ratio, we will be somewhere on the Triangle. In a variation of Stein’s Law, an outcome that must happen will happen. (Feel free to enlarge the Triangle if you think we might end up outside the one I have drawn. From today’s vantage point, you are simply enlarging the area of seemingly unacceptable or infeasible outcomes.)
The only question is the destination within the Triangle and the pathway from here to there. A key question is whether this pathway will be incrementally negotiated as the public and government leaders slowly begin to grapple with the available choices, or whether it will take some calamitous event.
In my opinion, we should put even more focus than we have been on reducing the rate of increase in health spending below that of GDP (without sacrificing the gains in expanded coverage). This will bring our health spending share of GDP down closer to other advanced nations and make our other federal budget choices somewhat more palatable (though still very painful).
Author’s Note
I thank the Robert Wood Johnson Foundation for generous financial support and our project officer, Katherine Hempstead, for sage advice and encouragement.
Note 1
The idea is to reduce annual budget deficits to stabilize the debt to GDP ratio. The required amount depends upon the prevailing debt to GDP ratio and the relationship between the interest rate and the growth rate in GDP. My justification for the half percent of GDP figure is here.
Note 2
Each diagonal line corresponds to a fixed percent of GDP available for federal health spending with greater amounts available as one moves downward (less spent on defense and non-health) and to the right (more collected in taxes). My model allows me to convert these diagonals into corresponding rates of increase in overall health spending, expressed relative to the growth in GDP. Details can be found here.
Note 3
This historic highs and lows are computed from CBO data. I use 10 year moving averages to smooth out the effects of business cycles.
Note 4
Recessions push up the share of GDP spent on defense and other non-health as GDP stalls while defense spending holds steady and safety net spending accelerates.
Note 5
Thus the 4 percent increase in taxes in choice (1) refers to increasing tax revenues from the historic high of 18.3 percent of GDP to 19 percent of GDP.
from Health Affairs BlogHealth Affairs Blog http://ift.tt/28PTB6i
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