Doug Badger: A major threat to our economy -- health care spending

Few factors are more critical to economic growth than health care. And few threaten future economic growth more than health care spending.

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That conundrum lies behind continued political agitation over health care, both in the U.S. and throughout the highly-developed world.

Advances in medicine have eradicated diseases, extended life expectancy, reduced infant mortality and increased productivity. But rising medical spending also has suppressed wages, pressured government budgets and siphoned public resources from infrastructure, education and other investments.

Health spending constituted 17.9 percent of U.S. economic output in 2017 and will continue its inexorable growth.

There is a silver lining. Five-year cancer survival rates have improved, mortality rates for heart disease have declined, and chronic diseases are better managed.

More people are employed in the health sector than in any other segment of the economy, and the growth in health care jobs appears to be recession-proof. The U.S. is the global leader in biomedical research and development, strengthening the domestic economy.

But there are ominous signs.

Perhaps most ominous is the growing burden health spending has placed on taxpayers. Health entitlements are the largest and fastest-growing component of the federal budget and the leading cause of long-term fiscal instability.

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Health entitlement programs are crowding out other government spending. In 1989, the federal government spent 57 percent more on non-defense discretionary programs like education, job training and transportation than it did on health entitlements. Since then, health spending has tripled in real terms and is now twice what Washington spends on non-defense discretionary programs.

An aging population accounts for much of that increase. Medicare has 61 million enrollees and is adding an average of 1.6 million beneficiaries annually. Spending per beneficiary exceeds $14,000, a figure projected to compound at an average annual rate of over 5 percent during the next decade.

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But an older population doesn’t completely explain the spending increase. Congress has expanded existing federal programs and created new ones. Federal spending on Medicaid and other income-related health programs has more than tripled in real terms over the past 30 years and will continue growing.

This year, the government will spend 6 percent more on health entitlements than on Social Security. In 30 years, that gap will grow to 50 percent.

America’s fiscal crisis, in short, is a health spending crisis.

Private health spending also has grown, burdening businesses and workers. More than 178 million Americans have job-based coverage, the leading source of health insurance in the U.S.

This coverage is the fastest-growing component of employee compensation, depressing wages. A study by the Council for Affordable Health Coverage found that rising health insurance premiums caused earnings to decline between 1999 and 2015 for workers in the bottom 40 percentiles of earnings.

Total public and private health spending is the highest in the world. Per capita U.S. spending on medical care was $10,586 in 2018, compared with an average of less than $4,000 among OECD nations.

Some use that figure to argue in favor of turning all health financing over to the federal government. Other countries, the reasoning goes, centrally finance health care and spend less than Americans do. Therefore, health spending would decline if the U.S. government adopted the policies of other governments.

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The argument is flawed. First, a RAND Corporation analysis of Medicare For All found that it would increase health spending, enlarging the gap between the U.S. and other countries.

Second, the U.S. is hardly unique in struggling with rising health spending. U.S. health spending is projected to grow more slowly than the OECD average through 2030, meaning it will outperform many countries with centralized financing.

Shifting the entire burden of health financing onto the U.S. government is more likely to worsen fiscal strains than to relieve them.

A more promising avenue is to pursue reforms that provide privately and publicly insured patients, as well as employers who sponsor coverage for their workers, with information and incentives to use medical services more efficiently. 

A more promising avenue is to pursue reforms that provide privately and publicly insured patients, as well as employers who sponsor coverage for their workers, with information and incentives to use medical services more efficiently.

Public and private health insurance arrangements typically do the opposite: concealing prices from patients and making medical care appear free (or nearly so). Such arrangements render patients bystanders and feed a perverse dynamic in which medical prices rise without reference to value.

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In virtually every other sector of the economy, innovation gives us more for our money (think mobile phones, computers, cars and appliances). Applying those same forces to health spending would put downward pressure on prices while preserving quality.

Price disclosure and financing structures that incentivize consumers may not be sufficient to contain the health care spending spiral, but they are essential to its success.

Doug Badger is a Visiting Fellow in Domestic Policy Studies at the Heritage Foundation.