Issues & Solutions | Peter G. Peterson Foundation | Our America. Our Future.

I. Introduction

II. Composition of the Health Care System

III. Trends and Projections

I. Introduction

Health care costs are the major cause of the federal government’s long-term fiscal problems. In 2008, the most recent year for which data is available, national health expenditures grew by 4.4 percent, totaling $2.3 trillion (16.2 percent of GDP, or the total economy).  The federal government paid for more than a third of that total.  If health care costs remain at that level and grow at a slower rate than the economy, then the federal fiscal outlook could dramatically improve.  However, according to the Congressional Budget Office (CBO), federal health care costs are projected to grow to almost 11 percent of GDP in the next twenty five years—significantly adding to federal deficits (see Figure 1). These projections are driven by two trends:

• National health care costs have grown faster than the economy in the past.
• Americans are having fewer kids and living longer than they used to, so the percentage of the population over the age of 65 is growing.  

----------------------------
¹ In 2008, the federal government spent $817 billion (about 6 percent of GDP) on health care costs.

Figure 1. Federal Health Expenditures, 1960-2040

 II. Composition of the Health Care Financing System

Forty-seven percent of all health care in the United States is paid for directly by the government—35 percent by the federal government and 12 percent by state and local governments. Private employers, individuals, and some philanthropic groups pay the remainder. Some key facts:

• Federal, state and local governments finance nearly half of all of U.S. health care (see Figure 2).
• The majority of private payments are made through health insurance. Most insured people get their coverage through an employer.
• Health insurance plans have deductibles and co-pays that require insured patients to pay for part of the bill out-of-pocket.
• Fifty one million Americans—nearly seventeen percent of the population—are currently uninsured. As new health reform provisions are put into place, the number of people without insurance will drop significantly, leaving an estimated six percent of the population uninsured (see Figure 4).

Figure 2. Composition of Health Care Spending

Federal Health Insurance Programs

The government provides health care services to citizens through several different programs. The largest program is Medicare, which provides health services to people over age 65.  The second largest is Medicaid, which provides health insurance to low-income individuals and their families. States administer Medicaid and share its costs with the federal government, which pays about 60 percent of its costs. The Affordable Care Act (ACA)is fully implemented, the federal government will have additional responsibilities for regulating the new health insurance Part A (Hospital Insurance) and Part D (Supplemental Medical Insurance). Part A provides free insurance that covers hospital stays for people over the age of 65. Part B covers physician visits, outpatient and other services not covered by Part A. Part B is a voluntary program and requires beneficiaries to pay premiums that will offset 25 percent of Part B costs, and some high-income beneficiaries have to pay higher than average premiums. Part D is similar to Part B but covers prescription drugs. Part C (or Medicare Advantage), gives seniors a voucher to buy private medical insurance instead of using traditional Medicare.

Medicare is the largest component of federal health spending and is projected to grow dramatically as health care costs continue to rise and poverty line—approximately $29,327 for a family of four. That expansion is projected to increase Medicaid enrollment by 16 million –from 35 to 51 million people by 2019.

Exchange Subsidies:

The new health care reform law will require individuals to obtain and maintain health insurance coverage, and to help make coverage affordable. It will allow individuals who are not covered by employer provided health insurance, Medicare or Medicaid to purchase subsidized private health insurance in newly created exchanges. The subsidies will be available to families with earnings between the poverty line and four times that level on a sliding scale, so that no family has to pay an “unaffordable” percentage of their income on health insurance. A family of four with a household income of $22,050 would have to pay no more than $882 annually for health insurance premiums, and a similar-sized family with $88,200 in income would have to pay no more than $8,644 annually for health insurance. The subsidies will go into effect in 2014, and the exchanges will provide coverage for 24 million people by 2019; their cost will be $88 billion in 2019, or 0.4 percent of GDP.

----------------------------
² The maximum family contribution for insurance premiums will be 2 percent for families earning below 200 percent of the poverty line and will gradually increase to 9.8 percent of income for families earning between 300 percent and 400 percent.

III. Trends and Projections

Over the last 25 years, overall per capita health care costs have grown much faster than the economy and doubled as a share of GDP. Medicare growth has exceeded GDP growth by 1.5 percentage points, and Medicaid has exceeded GDP growth by 1.2 percentage points, annually. CBO’s long-term spending projections are based on an extrapolation of these historical trends. However, these projections are inherently uncertain, the ACA makes them even more so. The ACA is partially financed by restrictions on future Medicare growth. It caps the growth of Medicare payment rates to levels significantly below historical rates of health care cost growth, and may not be sustainable over time. To accommodate that uncertainty, CBO publishes two sets of projections reflecting differing assumptions about lawmakers’ policy decisions. One, the “extended-baseline” or “current law” projection, assumes that Congress and the President does not make any changes to the laws, even if those laws require such drastic cuts to Medicare that they are likely to be overturned. For example, the current law baseline assumes that the Sustainable Growth Rate (SGR) formula will be left unchanged, even though it would cut payments to physicians by 23 percent on December 1st of this year.  The second, “alternative fiscal scenario,” assumes that the President and Congress will enact certain changes to Medicare to avoid unrealistic cost reductions.  As a result, Medicare growth rates would be more in line with historical trends. (See Figure 3 for projected health care spending growth under the two baselines.)  Therefore the eventual impact of the ACA on future deficits is unclear and depends on the actions of future legislators.

IV. Composition of Health Insurance Coverage

ACA is expected to reduce the number of people without health insurance through the newly created exchanges or through the expansion of Medicaid eligibility. Independent of the legislation, a growing number of people will receive their coverage through Medicare as the baby boomers hit age 65 and life expectancy rises. (See Figure 4 for estimated changes to health insurance coverage as a result of ACA.)

Figure 4. Composition of Health Insurance Coverage

V. Conclusion

The rapid growth in health care costs strains public and private budgets. Finding solutions that will restrain that growth, while improving health outcomes is essential to improving the long-term outlook for the budget as well as the economy’s future prospects. Federal health care costs threaten to crowd out just about everything else in the budget or lead to a rapid accumulation of government debt. Private health care costs will take up a larger and larger portion of family income unless cost growth can be limited to the growth rate of GDP.

Other Helpful Resources:

Websites

Center for Medicare & Medicaid Services

Congressional Budget Office

Health Affairs Blog

Health Policy Center

Kaiser Family Foundation