Time to Act on Health Care Costs: Near-Term Changes to the Consumer and Provider Sides of Health Care Financing Are Essential to Prevent the Nation from Being Overwhelmed by Rapidly Rising Health Care Expenditures

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Popular discussions of the long-term fiscal challenges confronting the United States usually misdiagnose the problem. They typically focus on the government expenses related to the aging of the baby boomers, with lower fertility rates and longer life expectancy causing most of the long-term budget problem. In fact, most of the long-term problem will be driven by excess health care cost growth; that is, the rate at which health care costs grow compared to income per capita. In other words, it is the rising cost per beneficiary rather than the number of beneficiaries that explains the bulk of the nation's long-term fiscal problem.

One can see this phenomenon manifesting itself even in the next decade: Figure 1 shows the Congressional Budget Office's (CBO's) projections for spending on Social Security, Medicare, and Medicaid through 2017. As Figure 1 shows, Social Security rises by about 0.5% of gross domestic product (GDP), from 4.2 to 4.8%, over that period. Spending on Medicare and the federal share of Medicaid rises from 4.6 to 5.9% of GDP--an increase of 1.3%, or roughly twice as much as that for Social Security.

If one looks further into the future, the basic point is accentuated. Figure 2 portrays a simple extrapolation in which Medicare and Medicaid costs continue to grow at the same rate over the next four decades as they did over the past four decades. (Fortunately, even with no change in federal policy, there are reasons to believe that this simple …