Lets Kick The Can Down The Road

Last month we tiptoed away from the fiscal cliff. This month we are bumping up against the debt ceiling, and if we avoid that concussion, later this spring we’ll clash on the budget threatening to shut the Federal government down. Congress members from Harry Reid to John Boehner are declaring that we can’t continue to kick this can of long-term budget deficits down the road.

With respect to health care I would suggest that “kicking the can down the road” is exactly what we should be doing. Our current deficits are largely the result of a large tax cut, two wars, and the Great Recession. Hopefully the wars are winding down, we are slowly growing our way out of the recession and for better or worse some of the tax cuts have been repealed. In any case, in the short term deficits are having no effect on the economy: interest rates near zero, price inflation in minimal, and the cost to the government of borrowing is as low as it has ever been.

In the long term however, large Federal deficits are projected to significantly weaken the economy by increasing interest rates and inflation. Addressing long-term deficits requires addressing the causes of those deficits. The Congressional Budget Office (CBO) has separated the major components of Federal spending in the chart below. CBO has expressed those components as a percentage of Gross Domestic Product (GDP). From that chart it is easy to see that the major driver of Federal budget deficits is health care expenditures. Social Security, defense, and all other spending are projected to remain largely constant as a percentage of GDP. That means you could lower future deficits by cutting other spending, but if health care costs aren’t addressed all long-term structural deficits will remain.

Health care cost inflation is a complex and difficult problem to address. At the heart of the issue is the tension between access to new life enhancing and saving technologies, and the costs of financing that care. A rich set of complex solutions have been offered and debated over the last 50 years. While there is some consensus on the need to change incentives and behaviors of both consumers and providers, there is still a great deal of uncertainty and experimentation on how to actually lower the rate of health care cost inflation.

In the past decade the health care delivery system has developed and begun to implement health information technologies, performance metrics, integrated systems of care, reimbursement methodologies, and innovative health insurance plan designs. All of these innovations have been hailed as necessary components of a cost-effective health system. To date none of them have been applied in the right combination with the adequate scale to definitively determine their effectiveness in slowing overall health care cost inflation. The Affordable Care Act includes a number of incentives and direct subsidies intended to accelerate the creation of these systems of care and the adoption of these innovations.

Congress, on the other hand, faces very few options in the current budget debate that would credited as reducing future Federal health expenditures that aren’t already part of the Affordable Care Act. Basically they can cut the number of individuals eligible for public programs, they can cut benefits, or they can cut reimbursements. None of these alone address the problem and they could in fact result in higher health care and other costs. Raising Medicare eligibility ages for example could result in increased Medicaid enrollment by individuals who delayed care.

The widely cited Simpson-Bowles plan for deficit reduction actually endorses the experiments contained in the ACA and recommends “CMS be directed to aggressively pursue these and other reforms, including introduction of downside risk to ACOs and bundled payment pilots.”(p. 41)

It would be naive to believe that the current debate on government spending is all about deficits. The proper role and the size of government are at least as important elements of the debate as long-term economic effects of Federal budget deficits. However, to the degree changing the trajectory of Federal health spending is an important goal then kicking the can down the road as the health care delivery system transforms may be the optimal strategy.

Sources of Federal Spending as a Percentage of GDP

Sources of Federal Spending as a Percentage of GDP

Reference:

The National Commission On Fiscal Responsibility And Reform, The Moment of Truth, December, 2010, p. 41 accessed at
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

2 comments Add your comment

Tom McDougald

January 21st, 2013
10:57 am

Stupid is as stupid does. The longer we kick the can down the road the longer & worse the consequences
will be. Why would anyone do this to our children and grandchildren whom we supposedly love & care for ?
The obvious common sense solutions are lost on liberals & extremists such as academics & most media.
So we will continue to be bombarded with B.S. in their hopes that we will eventually become their lemmings.
To them there is no price to pay to “have it all” now and forever in the future !

Rick LaPlante

February 2nd, 2013
10:27 am

Second what Tom said. The solution that is studiously being ignored is that everything is NOT fixed. Those nice graphs show expenses as a percent of GDP. Most of the expenditures are based on numbers of people, which is fairly fixed, although may suffer some more under the onslaught of immigration “reform” that is being pushed through regardless of whether we have jobs for all these additional people, or even if they are able to work (doesn’t help the curve to keep adding to the food stamp and welfare roles). What is not fixed is GDP. It is clear that it is not helped by government subsidies in unproven technologies being run by donors to the current administration or by increased regulations hat benefit large existing businesses by making it much more difficult for startups. But it is equally clear that every time in our history that the government has gotten out of the way of the free market that our economy has boomed. And when that happened in the past unemployment went down, welfare went down, and the GDP dramatically increased. Since government tax receipts always hover around 19.5% of GDP regardless of rates (Hauser’s Rule), the only good solution is to increase GDP. The world is desperate for a safe haven for investment with everything seeming so dangerous everywhere else. There is $13 TRILLION of money sitting in hiding outside the country that could be here if we weren’t a hostile business environment. We have the highest taxes on business of any country in the world and the most regulated and most litigious. No company in its right mind should want to startup here. But that is fixable if our leader would but lead. We could grow ourselves out of these problems. A stronger economy and increasing GDP makes it all easy. Almost all of our economic problems, which have gotten substantially worse in the past 4 years are BECAUSE of our government. And the biggest problem, the cause of the overwhelming debt, is our government that persists in not getting itself out of the way in hundreds of ways but instead makes pretty speeches. We have a Senate that cleaves to party instead of representing the states OR the people. We have a House that worries about reelection more than their oath of office. And we have a president that….. sounds good. None of this is likely to help our GDP at all.

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