Healthcare Costs Are a Major Driver of the National Debt and Here’s the Biggest Reason Why

As the recent long-term projections from the Congressional Budget Office (CBO) show, the national debt is on an unsustainable path. Under current law, the nation’s debt trajectory will rise from nearly 100 percent of gross domestic product (GDP) in 2023 to 181 percent in 2053. One of the largest drivers of that rising debt is federal spending on major healthcare programs, such as Medicare and Medicaid. Such spending is projected to rise by 78 percent over the next decade and will exceed all other categories of federal spending in 2030. By 2053, such spending will account for nearly 30 percent of the federal budget, exceeding the total amount spent on discretionary programs, such as defense and education, by about 40 percent.

The amount the federal government spends on major healthcare programs is broadly influenced by two factors:

1. The changing demographics of the population: Older individuals spend more, on average, on healthcare than younger individuals. And as more people reach age 65, enrollment and therefore spending on federal programs like Medicare rises.
2. Additional cost growth: Generally defined as the rate at which healthcare costs, adjusting for demographic changes, outpaces the growth rate of the economy. When such cost growth occurs, the amount the federal government spends on healthcare programs will rise.

Here we focus on the latter of those factors and its effect on the federal budget. Below is an overview of additional cost growth, its contribution to rising healthcare costs, and why it matters for fiscal sustainability.

Why Does Additional Cost Growth Matter?

The amount that the federal government spends on healthcare can rise due to a number of factors. Evaluating additional cost growth helps economists and policymakers isolate how much of the growth in healthcare spending is due to rising healthcare costs as opposed to other factors. For instance, part of the growth in federal healthcare spending is due to the aging of the population, which increases enrollment in programs such as Medicare. At the same time, spending may also grow due to the general growth in the economy, because as economic output rises, so too may the cost of healthcare. Additional cost growth captures the growth in healthcare spending above and beyond what is already accounted for by demographic changes and the growth in the economy. More explicitly defined, additional cost growth is the rate at which healthcare costs per person, adjusted for demographic changes, outpaces the growth in GDP per person.

Additional cost growth has varied considerably over the past 45 years, according to data from the Centers for Medicare & Medicaid Services. Spurred by high healthcare costs stemming from factors such as innovations in medical technology and rising prices, additional cost growth was the highest in the 1980s, averaging 3.0 percentage points during that decade There was no additional cost growth from 1995–2000 and 2010–2015 because the economy grew faster than healthcare costs per capita (adjusted for demographic effects). Additional cost growth has since grown to 0.3 percentage points from 2015–2021, primarily due to the growth in healthcare costs throughout the first year of the pandemic.

How Will Additional Cost Growth Contribute to the Rise in Federal Healthcare Spending?

Additional cost growth is projected to occur across most areas of the U.S. healthcare system, including federal programs such as Medicare and Medicaid. Because 43 percent of healthcare spending was financed through such programs in 2021, additional cost growth will have important spending ramifications for the federal government. Over the next 30 years, federal spending on healthcare (not including offsetting receipts of premiums) is projected to climb from 6.5 percent of GDP in 2023 to 10.1 percent in 2053. According to the Congressional Budget Office (CBO), about two-thirds of that growth is due to additional cost growth.

In 2034, the earliest year for which CBO reports such estimates, additional cost growth is projected to be 1.69 percentage points in Medicare and 1.59 percentage points in Medicaid. While those levels are projected to decline by 2053, reaching 0.22 percentage points and 0.60 percentage points for Medicare and Medicaid respectively, it still remains that healthcare costs, adjusted for demographic changes, are projected to outpace economic growth in the federal healthcare system. That trend is primarily driven by factors such as rising medical prices and growth in real (inflation-adjusted) national income per person, as healthcare spending has traditionally risen with increases in income.

How Would Constraining Additional Cost Growth Affect the Fiscal Outlook?

While reducing additional cost growth is no easy task, constraining healthcare costs would reduce federal spending on healthcare and decrease budget deficits — making the nation’s fiscal outlook more manageable. In fact, if healthcare costs grew at about the same rate as the economy, gross spending on healthcare by the federal government would only be 7.1 percent of GDP by 2053 — a 21 percent reduction from its current projected level. That reduction in federal spending would likely ease pressure on the nation’s fiscal picture. For example, instead of debt held by the public growing to 181 percent in 2053 as projected under current law, in a scenario where additional cost growth is eliminated immediately, the projected debt-to-GDP ratio would be around 25 to 30 percentage points lower (such an estimate does not account for the effects of reduced spending and lower deficits on the economy).

Restraining Rising Healthcare Costs Is the Key to Sustainable Fiscal Future

If healthcare costs continue to rise at their current levels, they will impose a financial burden on Americans and exacerbate the nation’s fiscal outlook. The U.S. healthcare system is expensive and complex, so tackling the nation’s exorbitant healthcare costs will likely require enacting broad-based reforms or involve implementing numerous solutions. To that end, a number of broad strategies have been proposed, including, but not limited to:

• Implementing healthcare cost growth targets to help healthcare systems track and control costs
• Containing the rise in prices for healthcare goods and services, such as prescription drugs
• Reducing inefficient and wasteful healthcare spending

Improving the U.S. healthcare system will be crucial to providing quality, affordable healthcare and to bettering our nation’s long-term economic and fiscal wellbeing. High and rising debt can have a number of damaging implications for the U.S. economy — slowing the growth of the economy, constraining lawmaker’s ability to enact deficit-financed policy, and even elevating the risk of a fiscal crisis in the future. To put the nation on a sustainable fiscal and economic path, addressing healthcare costs must be priority for policymakers.

Related: How Can We Reduce the Cost of an Increasingly Expensive Healthcare System?

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