ECONOMIC COMMENTARY:

Health-Care Crisis Endangers Economy

June 24, 2008—If the United States does not act soon to address health-care costs, federal and state governments as well as American businesses could face a cascading fiscal crisis with devastating long-term consequences, says a new report by the Government Accountability Office.

In the report entitled, “Long Term Federal Fiscal Challenge Driven Primarily by Health Care,” the GAO, the investigative arm of Congress, said an immediate “multi-pronged solution” must be pursued before the “window of opportunity” to address the issue closes.

“Rapidly rising health-care costs are not simply a federal budget problem,” said the report, prepared by Gene Dodaro, acting U.S. Comptroller General. “Growth in health-related spending is the primary driver of the fiscal challenges facing state and local governments as well.

“Unsustainable growth in health-care spending also threatens to erode the ability of employers to provide coverage to their workers and undercuts their ability to compete in a global marketplace.”

Over recent decades, a patchwork U.S. approach to health care has evolved with many employers offering health insurance to workers; federal Medicare covering health costs for the elderly; state Medicaid programs providing limited care for the poor; and tens of millions of Americans uninsured.

By contrast, most industrial countries offer government-funded health insurance paid for through taxes, freeing up businesses from the direct costs and thus allowing them to charge less for their exports.

The GAO report said health-care costs are putting mounting pressure on both U.S. government budgets and the broader economy.

“Federal expenditures on Medicare and Medicaid represent a much larger, faster-growing, and more immediate problem than Social Security,” the report said.

“Medicare and Medicaid are not unique in experiencing rapid spending growth, but instead this growth largely mirrors spending trends in other public health-care programs and the overall health-care system. A number of factors contribute to the rise in spending, including the use of new medical technology and market.”

Complicating the long-term economic issue for the United States is the fact that for years the federal government has financed federal initiatives with surpluses in Social Security trust funds.

“When such borrowings occur, the Department of the Treasury issues federal securities to these government funds that are backed by the full faith and credit of the U.S. Government,” the GAO report said.

“Although borrowing by one part of the federal government from another does not have the same economic and financial implications as borrowing from the public, it represents a claim on future resources and hence a burden on future taxpayers and the future economy.

“If federal securities held by those funds are included, the federal government’s total debt is much higher—about $9 trillion as of the end of fiscal year 2007.”

Last week, before the Senate Finance Committee, Dodaro testified that immediate health-care reform is essential.

Peter Orszag, director of the Congressional Budget Office who also testified, said “health-care spending is the single most important factor determining the nation’s long-term fiscal condition” and added that the U.S. political system is not very good at addressing long-term problems.

“But the problems caused by rising health-care costs are not just long-term ones,” Orszag said. “In fact, some of them are already having significant effects on various aspects of our society.

“Health-care costs are already reducing workers’ take-home pay to a degree that is both underappreciated and at least partially unnecessary, consuming roughly a quarter of the federal budget, and putting substantial pressure on state budgets (mostly through the Medicaid program), thereby constraining funding for other governmental priorities.”

Orszag said the federal government has dealt with this economic crisis by continuing to borrow heavily from other countries, which he said may not be sustainable.

Sen. Max Baucus, D-Montana, chairman of the Senate Finance Committee, said that since 1975, health-care spending per capita has outpaced overall economic growth at a rate of 2.4 percent faster in Medicare, 2.2 percent faster in Medicaid, and 2 percent faster in other health-related areas.

“Unless we act, in 2030, the federal budget deficit will grow to more than 10 percent of the economy,” Baucus said. “In 2050, it will be more than 22 percent of the economy. And by 2082, it will exceed 54 percent of the economy.

“These deficits would dwarf the post-World-War-II record of 6.3 percent in 1983. If we control health-care costs, then along with prudent policies for the rest of the budget, we will be able to control federal budget deficits. But if we fail to control health-care costs, it won’t matter what else we do in the rest of the budget. We will have no hope of keeping federal budget deficits under control.”

The GAO report supported Baucus’s dire economic predictions.

“Health-care costs are growing much faster than the economy, and the nation’s population is aging,” the GAO report says. “These drivers will soon place unprecedented, growing and long-lasting stress on the federal budget. Absent action, debt held by the public will grow to unsustainable levels.”

Providing taxpayers with affordable health-care has been a cornerstone of Democratic Sen. Barack Obama’s presidential campaign. He favors a mix of incentives, subsidies and mandates to individual and employers that largely would leave in place the private health-insurance industry.

Sen. John McCain, the presumptive Republican presidential nominee, has offered a health-insurance plan weighted toward tax incentives, similar to the one favored by President George W. Bush.

The GAO also recommended tax increases and spending cuts to deal with the looming fiscal crisis. However, in an election year, it’s unlikely either presidential candidate would embrace that idea.

McCain has vowed not only to make President Bush’s tax cuts permanent but lower other taxes as well.

Baucus agreed that the fiscal issue requires immediate attention, but he recognized that it’s unlikely that lawmakers will take action to address the crisis until a new administration takes office in 2009.

By then the issue will surely be worse, the GAO report said.

“The longer action on reforming heath care and Social Security is delayed, the more painful and difficult the choices will become. Simply put, the federal budget is on an unsustainable long-term fiscal path that is getting worse with the passage of time. The window for timely action is shrinking.”