2009 July 23 Thursday
Obama Medical Plan Adds To Unsustainable Medical Costs

Barack Obama and his Congressional allies in the Democratic Party want to enact a big new entitlements program for medical benefits for the non-retired. Cost is a huge problem since the US deficit is already quite large and existing entitlements programs (which are mostly medical) are already on course to soar in costs. Douglas Elmendorf, director of the Congressional Budget Office, outlines just how much Medicaid and Medicare will grow as a percentage of GDP.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

I think those figures are optimistic because I believe the conventional wisdom about future economic growth rates in the US economy are unrealistic. We have demographic and geological (oil and other resources) problems that will hold down economic growth in the next couple of decades and beyond. So these entitlements programs will need to take larger slices of the US economy in order to fund growing portions of the population of retirees and of lower performing and lower earning workers.

Higher taxes will lower earning power. You will need to increase your before-tax income much faster than the rate of inflation in order to increase your after-tax income.

Medicare is a big obstacle for Obama's ambitions because Obama wants to fund medical spending for poor people in part by cutting spending growth in Medicare. The old folks (and those near retirement) are starting to push back against that idea. The existence of Medicare basically puts old folks in an opposing faction against the poor younger medically uninsured.

Everything else is going to get squeezed by medical spending and old age benefits.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

I think we should make a much more concerted effort to automate the provision of medical care and to reduce the need to see doctors. Software expert systems and lab tests done from samples collected at pharmacies should be elements of lower cost future of medical care. Rather than spend huge amounts of money on delivering medical care with current cost structures we should spend smaller amounts on automating the jobs of highly expensive medical care providers.

Leave aside for the moment whether you favor or oppose government spending on medical care. If the government is going to create a new and extremely expensive entitlements program it should be careful in the design of such a program and should know what will work and what will fail or be more expensive. The history of government medical programs has been far greater costs and problems than originally projected. Mitt Romney, who as governor of Massachusetts has experience extending health insurance to poor people, argues that the Obama administration is proceeding without proper analysis or understanding of how their medical plan will work in practice and that design of such a hugely expensive undertaking requires a lot more time and effort.

The legislation has almost nothing to do with cost reduction. Nothing I have seen in the bills that are being discussed by the Democratic leadership suggests that there will be a significant change in health inflation. This is an extraordinarily important topic and one for which there is a great deal of information around the world. Normally, if this were private enterprise, you would spend a great deal of time with brilliant analysts, looking at alternatives, evaluating lessons from foreign places, and perhaps even experimenting with some alternatives before unleashing them on the entire U.S. economy. Health-care reform is a matter that should be focused on allowing our citizens to have better health at more reasonable cost, as opposed to being thought of as a political success or failure. We really can't afford a lot of trillion-dollar mistakes.

The Massachusetts plan to raise the rate of medical insurance has not put a lid on costs.

Three years after mandating that residents get health insurance and requiring employers, insurers and taxpayers to chip in, Massachusetts has yet to control soaring costs that are eating up half its budget.


Dealing with cost and quality has proved trickier. Higher health care costs fueled a combined $9 billion gap in the state's 2009 and 2010 budgets that had to be closed last month, leaving less for education, public safety, the environment and other services.

Want less spending on education or the environment or public safety? Want fewer police and fewer prisons? Support expanded medical care spending. Better start lowering your living standard now. Get ready for the New Austerity.

Bush made a couple trillion dollar mistake in Iraq. Clinton, Bush, and Congress made an even bigger mistake with financial regulation. Now Obama and his allies are trying to make a far larger health care spending mistake. I'm opposed.

Share |      By Randall Parker at 2009 July 23 06:43 AM  Economics Health

Ned said at July 23, 2009 11:19 AM:

Randall, I think you miss the point of the whole exercise. The whole idea of the Obama program is to escalate costs. This thing is designed to force most citizens into the government insurance option. Once that has been acheived, costs, which will certainly be rising at an alarming rate, will be "controlled" by rationing, which is what countries with socialized health care systems do (e.g., Canada, UK, etc.) Don't underestimate the magnitude of what Obama is trying to do here - he wants to socialize almost all health care in the US. I hope he fails.

justme said at August 18, 2009 10:17 PM:

im a better writer than u
where did u go to sign up for the kaiser prucare moeny
i am much more capable of confusing and peddling fear than u

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