The primary driver of future projected debt and deficits has been the growth of federal healthcare spending, something that has alarmed economists as a wave of Baby Boomers retires and more people are added to the Medicare and Medicaid rolls.
But over the last four years, healthcare spending has grown at a historically slow rate. Economists credit the Affordable Care Act in part, as well as other reforms. And according to new projections from the Congressional Budget Office, the trend could continue.
In in its annual 25-year forecast of the federal budget, the CBO projected growth of federal spending on healthcare programs will continue to slow at a healthy rate over the next 25 years.
In a startling but continuing reversal of projection, the CBO said Tuesday that the federal government would spend about $US250 billion less on major federal healthcare programs than it had forecast in 2010, the year the Affordable Care Act was signed into law.
The CBO’s new projections say federal spending on major healthcare programs — Medicare, Medicaid, the Children’s Health Insurance Program, and federal subsidies for people buying insurance on the new Obamacare-established exchanges — will rise from about 4.9% of GDP this year to about 7.5% in 2035. The latter number is 2.2 percentage points lower than the CBO projected five years ago.
Medicare, in particular, is on an even better path. In 2006, the trustees who monitor the Medicare and Social Security programs said the trust fund that pays hospital bills would be broke by 2018. Now, that trust fund is expected to be solvent until at least 2030, according to the CBO. Overall, Medicare expenditures in 2035 are 2.6 percentage points of GDP lower than the office projected in 2009. Projected Medicare spending is down 35% from five years ago.
Peter Orszag, the former director of the Office of Management and Budget, told Business Insider it’s the equivalent of the “biggest fiscal development” in more than three decades.
“Health care spending has always been the core fiscal problem facing the United States,” Orszag said. “If we had passed legislation that knocked down long-term Medicare spending projections by 35% it would easily qualify as the biggest fiscal development since the early 1980s — and the fact that the changes are occurring for multiple reasons doesn’t alter that conclusion.”
From the Brookings Institute, here are two charts where you can see the healthcare and Medicare spending slowdown in action:
What’s behind the continued healthcare slowdown? The CBO attributed it to many different causes, including slower overall projected economic growth and lower-than-projected interest rates in the future. But the CBO also suggested for the first time that the federal government may be able to keep growth costs in line with overall inflation, based on requirements set in the Affordable Care Act.
“Other evidence suggests that hospitals and other providers may be able to achieve significant productivity gains or to restrain the growth of their costs in some other way,” the CBO report read.
Here’s the big caveat: Though the healthcare spending growth decline is expected to continue, it doesn’t mean the federal government is out of the woods. The “silver tsunami” of Baby Boomers will soon begin to retire, adding to an already ageing population that will add more to the Medicare rolls and make healthcare spending the federal government’s biggest expense by about 2030.
Overall, the CBO says federal debt is still on an unsustainable path, and projects it to reach 102% of GDP by 2039. The primary reason for that will be spending on the healthcare programs and Social Security, which are still projected to grow to about 14% of GDP together by 2039.
Orszag, though, thinks the projections might still be a little too pessimistic, despite the sudden stroke of optimism in the CBO report. Medicare spending is up about 1.2% this fiscal year, significantly lower than projections.
“If that continues,” Orszag said, “the fiscal picture looks even brighter.”