Presentation on Federal Health Care Spending

Posted by
Doug Elmendorf
November 13, 2013

I’m delighted to be speaking this afternoon to the Public Policy Initiative of the Wharton School at the University of Pennsylvania.

The federal government spent roughly a trillion dollars on health care in fiscal year 2013, and it gave up about another quarter of a trillion dollars in tax subsidies related to health care. That spending figure is a lot larger today than it was a decade or two ago, and it will be much larger still a decade or two from now. Indeed, growth in federal spending for health care is the key factor making the budget policies of the past unsustainable in the future. My topic for today’s talk is why federal health care spending is growing rapidly and what changes in policy could slow that growth. (In the interest of time, I’m focusing on federal spending for health care and leaving aside much of federal tax policy that affects health care, although it is also quite important.)

My remarks—summarized in my slides—draw heavily on CBO’s Options for Reducing the Deficit: 2014 to 2023 (which we released today), The 2013 Long-Term Budget Outlook (released in September), A Premium Support System for Medicare: Analysis of Illustrative Options (also released in September), and numerous analyses of the Affordable Care Act and proposals related to it (released during the past several months).

Federal health care spending is growing because of a combination of the aging of the population, an expansion of federal subsidies for health insurance, and rising health care costs per person. Since a central goal of policies regarding health and health care is to help people live longer, the more successful our policies are, the more population aging we will have. Hence, efforts to reduce federal health care spending need to be directed at the other two factors pushing up spending.

Reducing the number of people eligible for federal health care subsidies or the size of those subsidies would be a straightforward way to reduce federal spending. CBO has examined some potential reductions in federal subsidies, including repeal of the coverage provisions of the Affordable Care Act, the elimination of subsidies through that act for people with income above a certain threshold, an increase in the Medicare eligibility age, and an increase in Medicare premiums. Changes of those sorts would reduce federal spending but also would cause the affected people to bear higher costs, to lose health insurance in some cases, and to receive less health care in some cases. Also, the additional uncompensated care that would result would impose burdens on the medical safety net.

Alternatively, or in combination with a reduction in subsidies, lawmakers could change policies in ways designed to reduce health care costs per person. CBO has examined some approaches that might have that effect, including improving the health of the population, paying Medicare providers in different ways, increasing beneficiaries’ out-of-pocket costs in Medicare, creating a competitive market for private insurers in Medicare, and capping the amount that each state receives for Medicaid. Restructuring federal payments for health care holds the promise of encouraging greater efficiency in the delivery of care or better choices about the use of care—but it also would present risks of the same shifting of costs and loss of access to insurance and care.