Rising Healthcare Costs are a (Federal) Budget Buster

Rising Healthcare Costs are a (Federal) Budget Buster

Posted by Adam Kazda on 05/26/2017

Health Care DebateThis week, the Congressional Budget Office (CBO) released its analysis of how the updated American Health Care Act (AHCA) would impact the federal budget and the amount of people covered by insurance.  CBO projected the AHCA would result in about $119 billion in deficit reduction over the next 10 years and a reduction of 23 million people covered by insurance as compared to current law.  As we noted in our first health care explainer – these projections are just that - projections, and should be taken with a grain of salt.

While many politicians and pundits are reacting to this report, it is likely the Senate will come up with a different proposal that will have its own impact analysis.  Rather than opine on the accuracy – or lack thereof – of CBO projections, it is important to look at the impact of a known quantity - and that is the amount of federal spending on health care and the impact that health care costs have on the budget and national debt.  Fixing the health care system is the driving force behind the health care repeal and replace initiatives, but addressing our nation’s debt issues should be considered during the process. At the very least, Congress should not exacerbate the major problems that already exist.  

HC SpendingTotal health care spending comprises nearly 20% of the United States economy and continues to grow.  The largest healthcare spender is the federal government, which is responsible for 29% of all health care spending.  The federal government will spend more on health care this year than the federal government spent in total during its first 170 years in existence.  Federal spending is expected to rise at a faster rate than the economy over the next 10 years.  Add all those factors together and it is clear that the cost of health care is monumentally critical to our nation’s budget and the debt burden we are heaping on to our younger generations.   

Medicare spending has nearly doubled over the last 10 years (from $339 billion in 2005 to $646 billion in 2015) and is expected to skyrocket with the retirement wave of Baby Boomers.   Medicaid spending has also doubled over the last 10 years ($177 billion in 2005 to $344 billion in 2015) and continues to rise due to the expansion of Medicaid coverage under Obamacare.

As we have pointed out in our Inauguration Series, there are plenty of ways for the federal government to save money through our health care spending.  The amount of improper payments in Medicare and Medicaid in 2016 was a staggering $93 billion. That is more than the amount of tax dollars that went to the Department of State, Energy, Housing and Urban Development, and the National Science Foundation combined!

HC HBRThe Harvard Business Review determined that $1 trillion in waste and inefficiencies could be cut out of the health care delivery system.   They found that roughly 35 percent of all health care spending goes towards clinical waste, administrative complexity, excessive pricing, or fraud and abuse.   The key to get at this waste is promoting price and quality transparency, and moving away from fee-for-service provider payments.  

By changing the structure of how the federal government finances Medicaid, the House-passed American Health Care Act does make a major reform to Medicaid spending that will help stabilize the costs associated with the program.  Currently, the federal government matches state spending on Medicaid, covering between 50 to 80 percent of the costs – which means that some states can get up to nearly 3 federal dollars for every dollar they spend.  The federal government also covers 100 percent of the costs for those that were made eligible by Obamacare’s Medicaid expansion.

Since state governments get funding matches, a dollar spent by the state on Medicaid is worth more than a dollar spent on another state budget item.  This structure incentivizes states to concoct schemes to charge more of their budgets to the federal government.  States are incentivized to treat Medicaid like a credit card with the best rewards programs.  But they don’t have to pay the bill.  That will be left to our kids and grandkids.  

The AHCA would gradually change Medicaid financing from an open-ended matching program to a capped federal contribution based on the state’s Medicaid population.  This would end the incentives just mentioned while also allowing states to benefit from reducing Medicaid fraud – a $36 billion per year problem.   CBO projects that the Medicaid reforms under the AHCA would save about $834 billion over the next 10 years.  

HC MedicaidHowever, that Medicaid reform alone will not be enough to stem the rising tide of federal health spending.  Over the next 10 years, Medicare spending is projected to grow at a pace of 7 percent per year – more than doubling the expected pace of economic growth.  Likewise, spending on Medicaid would still increase even with the changes made by the AHCA.  Without changes that curtail growth in these programs, federal health care costs in these two programs alone will crowd out a significant portion of the budget and add an unsustainable amount to the national debt.  

HC BushUnder current law, in 2027, the federal government will spend more on just Medicare and Medicaid than the entire federal government spent when President George W. Bush took office.  It is no wonder that the Congressional Budget Office has called the growth in federal healthcare spending the greatest threat to budget stability.  

While there are constraints on what policies can be implemented in the Senate using the reconciliation process, containing costs should be a bipartisan exercise. Focusing solely on insurance coverage, rather than health care costs, would be a missed opportunity to work on our nation’s major fiscal woes.  


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Bryan BerkyBryan Berky
Executive Director
Bryan joined Restore Accountability in 2017 and provides expertise and commentary on today's important issues. Previously, he spent seven years on Capitol Hill working as a policy advisor for Senator Tom Coburn and Senator James Lankford...FULL BIO