Despite a robust economy, the U.S. budget deficit is on track to double over the next year, reaching a colossal $2 trillion. As bad as that sounds, the situation would be much worse without a surprising bright spot: health care costs, which have been rising more slowly than expected for more than a decade.
It’s a strange situation that upends decades of conventional wisdom in Washington. People said the key to deficit reduction was welfare reform. Social rights reform now seems possible – but only if people don’t try to introduce a deficit.
Rising health care costs have been a constant source of budgetary challenges for both the public and private sectors for decades. However, between 2010 and 2020, the Congressional Budget Office estimates that Medicare spending was nearly $1 trillion lower than initially projected. Economists and health experts have theories, but no one really knows why.
After a brief rise due to COVID-19, the downward trend has intensified. In February 2020, just before the pandemic, 21.7% of all U.S. household spending was on health care. This same figure was 19.6% in June 2022, its lowest level since 2008. It has rebounded slightly since then, but still remains at levels comparable to those of 14 years ago.
Reducing the federal deficit would require a combination of drastic spending cuts and huge tax increases that neither Democrats nor Republicans are in the mood to contemplate. But closing the long-term gap in Medicare funding — long the nation’s toughest budget challenge — could be achieved with bipartisan measures as painless as ever.
Economists expect cost growth to soon return to its decades-old pattern, but the recent reprieve offers an opportunity to end a long-running budget nightmare.
Both parties would have to be willing to give something. Republicans should agree to eliminate what could legitimately be called waste, fraud and abuse in the Medicare Advantage program, which allows seniors to choose private insurance over traditional Medicare. Conservatives have long touted it as a way to use market forces to contain long-term costs.
The program is popular with seniors and is successful in many ways. But the Committee for a Responsible Federal Budget estimates that overpayments to insurers participating in the program will cost taxpayers as much as $372 billion over the next decade.
Without going into detail, the reasons have to do with how insurers measure what’s called “average burden of disease.” While not illegal, the practice is widely recognized as an abuse of the system, and Republicans should be excited to see it go — even if it means cutting spending on their favorite program.
Democrats, meanwhile, should be prepared to curb some sort of diagnostic abuse that’s happening in the traditional Medicare system. The program’s reimbursement rates to physicians and hospitals are governed by regulations that require any changes to be budget neutral: increases in reimbursement rates for one procedure must be balanced by reductions for another, or by a another cost-saving measure.
The problem is that these regulations do not apply to new procedures and services and, unlike prescription drugs, there is no rigorous system for determining their effectiveness. Providers therefore have a strong financial incentive to adopt new procedures or technologies, rather than more efficiently and effectively use those already in place.
By 2033, according to one estimate, adding new procedures and services could increase Medicare spending by nearly $500 billion each year. Chris Pope of the Manhattan Institute, a conservative think tank, suggests that Medicare be forced to adapt to new procedures and services in a budget-neutral manner for a period of up to six months. Medicare could then request additional credits to cover those it deems most cost-effective.
Combined with savings from overcharging, a modest 10% reduction in spending on new services could save $600 billion over the next 10 years. This is enough to cover the Medicare trust fund deficit for the entire period.
Compared to a $2 trillion annual deficit, that may not seem like much. But it would clear a budget hurdle that has tripped up Congress for decades.
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president of federal policy at the Tax Foundation and an assistant professor of economics at the University of North Carolina.