Conference on the Long-Term Fiscal Crisis University of Southern California January 2010

The Long-Term Budget Outlook in the United States and the Role of Health Care Entitlements

Presented by

Donald Marron Georgetown Public Policy Institute

Based on the conference paper by

Joyce Manchester Jonathan A. Schwabish Congressional Budget Office

The views expressed in this presentation are those of the authors and should not be interpreted as those of the Congressional Budget Office.

Motivation

 In the absence of significant changes in policy, rising costs for health care will cause federal spending to grow much faster than the economy, putting the federal budget on an unsustainable path.  By 2035, CBO projects that the share of total government spending for health care will more than double to about 13 percent of GDP, up from about 6 percent of GDP in 2008.

 CBO projections indicate that federal debt will continue to grow much faster than the economy over the long run.

The Congressional Budget Office Budget Estimates

 The Congressional Budget Office (CBO) has prepared budgetary projections through 2080 under two different sets of assumptions about federal laws and policies.

–

Extended-Baseline

• adheres most closely to current law, following CBO’s 10-year baseline budget projections for the next decade and then extending the baseline concept beyond that 10-year window.

–

Alternative Fiscal Scenario

• represents one interpretation of what it would mean to continue today’s underlying fiscal policy. This scenario deviates from CBO’s baseline even during the next 10 years because it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past.

Total Spending for Health Care Under CBO’s Extended-Baseline Scenario

50 Actual Projected 45 40 20 15 10 35 30 25 5 0 1960 1970 1980 1990 2000 2010 2020 2030 Source: Congressional Budget Office, Long-Term Budget Outlook, Figure 2-1. June 2009.

All Other Health Care Medicaid

2040

Medicare

2050 2060 2070 2080

Federal Revenues and Noninterest Spending, by Category, Under CBO’s Extended-Baseline Scenario

40 Actual Projected 35 15 10 5 30 25 20

Revenues Other Federal Noninterest Spending

0

Year

Source: Congressional Budget Office, Long-Term Budget Outlook, Figure 1-1. June 2009.

Medicare and Medicaid Social Security

5 0 15 10 40 35 30 25 20

Federal Revenues and Noninterest Spending, by Category, Under CBO’s Alternative Fiscal Scenario

40 Actual Projected 35 30 25 20 15 10

Revenues Other Federal Noninterest Spending Medicare and Medicaid

5 0

Year

Source: Congressional Budget Office, Long-Term Budget Outlook, Figure 1-2. June 2009.

Social Security

5 0 25 20 15 10 40 35 30

Three Reasons That the Fiscal Challenge Is Especially Acute

 Current

policy

as perceived by many people would generate much larger deficits than current captured in CBO’s baseline.

law

as  Federal debt is already very large relative to GDP by historical standards.

 Population aging and rising health spending will continue to push up federal spending under current law.

Federal Debt Held by the Public as a Percentage of GDP

200 180 160 140 Actual Projected

Alternative Fiscal Scenario

60 40 20 120 100 80

Extended-Baseline Scenario

0 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: Congressional Budget Office, Long-Term Budget Outlook, June 2009.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security

25 20 15 10 5 0 2009 2019 2029 2039 Source: Congressional Budget Office, Long-Term Budget Outlook, June 2009.

2049

Effect of Excess Cost Growth Only Effect of Interaction Between Aging and Excess Cost Growth Effect of Aging Only

2059

In the Absence of Aging and Excess Cost Growth

2069 2079

Federal Fiscal Imbalance Under CBO’s Long-Term Budget Scenarios Projection Period

25 Years (2009-2033) 50 Years (2009-2058) 75 Years (2009-2083) 25 Years (2009-2033) 50 Years (2009-2058) 75 Years (2009-2083)

Revenues Outlays Fiscal Gap Extended-Baseline Scenario

21.6

22.0

22.7

23.7

24.6

25.9

2.1

2.6

3.2

19.9

19.6

19.9

Alternative Fiscal Scenario

25.3

26.5

28.0

5.4

6.9

8.1

Source: Congressional Budget Office,

Long-Term Budget Outlook,

June 2009.

Longer-Term Budget Projections

 CBO’s Long-Term Model – – – – Social Security Medicare and Medicaid All other spending generally grows with GDP Taxes  – Limitations of Long-Term Projections Uncertainty, especially for health programs – Interaction with macroeconomic conditions  – – Value of Long-Term Projections Highlight trends Provide baseline for policy changes

Rising Health Care Spending

10 Excess Cost Growth, in Percentage Points 8 Medicare and Medicaid 6 4 2 0 - 2 Total National Health Expenditures - 4 - 6 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Excess Cost Growth in Spending for Health Care

1975 to 1990 1990 to 2007 1975 to 2007 Medicare 2.9

1.7

2.3

Medicaid 3.2

0.8

1.9

All Other 2.3

1.3

1.8

Source: CBO,

Long-Term Budget Outlook, Table 2-3

(June 2009).

Total 2.6

1.4

1.9

Assumptions About Excess Cost Growth in Spending for Health Care Over the Long Term Medicare Medicaid All Other Spending for Health Care Rate in 2020 (Historical Average, 1975-2007) Annual Decline in Rate, 2020-2083 (Percent) Average Rate, 2020-2083 Rate in 2083

2.3

1.9

1.8

1.5

4.5

4.5

1.5

0.6

0.5

0.9

0.1

0.1

Source: CBO,

Long-Term Budget Outlook, Table 2-4,

June 2009.

Policy Options That Could Produce Budgetary Savings in the Long Run

 Create Accountable Care Organizations  Bundle Payments to Hospitals and Other Providers  Provide Additional Information About Treatments’ Effectiveness  Expand the Use of Preventative and Wellness Services and Primary Care  Increase Cost Sharing by Patients  Modify the Tax Treatment of Employment-Based Health Insurance

Imposing Ongoing Pressure to Increase Efficiency in the Health Care System

 Reduce Annual Updates in Medicare’s Payments to Reflect Expected Productivity Gains  Reduce Medicare Payments in Higher-Spending Areas  Combine Increased Discretion to Change Medicare with a Fallback If Savings Were Not Obtained  Limit the Growth of Medicare’s Subsidy of Premiums