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Manhattan Institute

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Health Care Will Bankrupt the Nation

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Health Care Will Bankrupt the Nation

U.S. News and World Report July 17, 2017
EconomicsBudget
Health PolicyAffordable Care ActMedicare/Medicaid

The status quo of federal spending is unsustainable. Reform is the only option.

After doubling to $20 trillion since 2009, the national debt is now projected to soar to an unfathomable $92 trillion over the next 30 years. At that point, depending on interest rates, between 60 and 100 percent of all individual income taxes will go towards paying the interest on this debt.

What is driving the federal budget into bankruptcy? Health care spending.

The problem is not tax revenues (they will continue growing above historical averages), nor other spending programs (Social Security is the only other major category growing as a share of the GDP).

Rather, health care is devouring the budget.

At some point, something has to give. And the "easy solutions" are fool's gold.

Remember this as Congress debates Obamacare and Medicaid reform. Critics denounce Republican attempts to "slash health care spending." In reality, their proposals would slow the growth of health care spending relative to the current baseline projections – projections that are completely unsustainable anyway.

After staying between two and three percent of the economy in the 1980s and 1990s, federal health spending has jumped to 5.5 percent of GDP today, on its way to a projected 9.3 percent thirty years from now – and even that assumes a long-term slowdown in the growth of per-capita health care costs.

For context, the entire federal budget has remained around 20 percent of GDP for the past 50 years. Each percentage point of the GDP translates into $190 billion, or $1,500 per household. So that overall growth from 3 to 9.3 percent of GDP would eventually require a permanent tax increase of $9,450 per household – a figure that would rise with incomes each year.

Federal spending cannot grow faster than the economy indefinitely. At some point, something has to give. And the "easy solutions" are fool's gold:

Cut defense? It is already on track to fall from 4.7 to 2.7 percent of GDP between 2010 and 2027 – leaving it at 1930s levels.

Tax the rich? The amount of annual income earned over the $1 million threshold currently totals 4.4 percent of GDP – one-third of which is already paid in federal taxes. At most, an additional one percent of GDP could be extracted before exorbitant marginal tax rates begin changing taxpayer behavior, harming the economy and costing revenue.

Single-payer health care? Sen. Bernie Sanders' 2016 proposal was scored as adding $32 trillion in new costs over the decade, in part because American proposals avoid the sacrifices and limitations that other countries mandate.

Just keep borrowing? According to the CBO baseline, the resulting national debt would bring crushing interest costs that eventually bankrupt the federal government.

The only solution is to reform the health care system.

Federal Medicaid spending has leaped from $201 billion to $389 billion since 2008, and is headed towards $650 billion a decade from now. This growth is driven by a bizarre system that allows states to determine eligibility and benefits and then bill Washington for up to 75 percent of the cost. So expanding Medicaid is always a bargain for states, while cutting it means surrendering "free money" from Washington.

It gets worse. States accepting the Obamacare Medicaid expansion could initially bill Washington for the entire cost of these new populations, before the reimbursement rate dipped to "only" 90 percent.

The Republican Medicaid plans would not reduce Medicaid eligibility. Rather, they would pull back the 90 percent reimbursement rate and eliminate the individual mandate. Down the road, states would be asked to choose between a single Medicaid block grant, or a fixed payment per-beneficiary (more expensive populations would receive a higher payment). States would finally be incentivized to set a fixed Medicaid budget and seek out efficiencies, rather than continually expand it at Washington's expense. These reforms would save $800 billion over the next decade, and reduce Medicaid's annual growth rate to a sustainable two percent.

This legislation should also replace ObamaCare with a better system guaranteeing all Americans access to health insurance without expensive Washington mandates that cause premiums to surge.

Finally, lawmakers should not forget a Medicare system that currently collects $140,000 in lifetime taxes from the typical retiring couple and then provides them with $422,000 in benefits (all adjusted into net present values). Multiply this by 77 million retiring baby boomers, and Medicare's long-term shortfall is measured in the tens of trillions of dollars.

America has several options on health care. Doing nothing is not one of them.

This piece originally appeared on U.S. News & World Report

______________________

Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here

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