Reining In Health Care Costs Key To Trimming Deficit

By John Ydstie

Published February 6, 2014 at 4:24 AM EST

The Congressional Budget Office earlier this week said this year's deficit is likely to be about one-third the size it was in 2009, when the Great Recession bottomed out. A recovering economy is the main reason for the deficit's improvement, but moderating health care costs have also contributed.

Harvard economist and health policy specialist David Cutler says getting the federal government's finances under control is all about health care.

"A fairly accurate summary of the federal budget is that the U.S. does not have a deficit problem — it has a health care problem," Cutler says.

The problem is that health care costs grew significantly faster than the economy in the 1960s, '70s and '80s — driving up the cost of government health care programs like Medicare and Medicaid. In the 1990s, increases slowed a bit, but then they peaked again in 2001.

These increases have led to projections of huge, unsustainable budget deficits in the future as baby boomers retire and demand more health care for their aging bodies.

"So if you say, 'What's affecting the long-range outlook for the federal budget?' it is almost entirely health care," Cutler says.

But a decade ago, increases in health care spending began to decline, and in the past few years, they've been historically low — between 3 and 4 percent a year. That moderation, if it continues, could have an enormous impact on the country's finances, Cutler adds.

"Just as an example, the Congressional Budget Office has modified a little bit its forecasts for cost increases over the next few years in health care, particularly Medicare and Medicaid, and that by itself has taken about $100 billion out of the expected deficit in 2020," he says.

But the CBO projects ballooning health care costs and exploding deficits in the decades after 2020. That's partly because a big factor that has reined in health care spending in recent years is fading.

Joe Antos, a health policy specialist at the American Enterprise Institute, says, "Certainly the biggest factor, although it's hard to put a number on it, is the recession and the slow recovery since then."

People reduced their health care spending during the recession that ended almost five years ago, and cost increases have been subdued ever since.

And some other factors holding down health care cost increases may also reverse. For instance, Antos says, there's been less innovation in medical devices and procedures in recent years and fewer new expensive blockbuster drugs.

"There's no reason to think that that's a permanent state of affairs, and it certainly is no reason to think that that's a good state of affairs. We do need better pharmaceuticals," Antos says.

But Cutler, who helped develop cost-control measures in Massachusetts, says there are forces in motion that could keep cost increases significantly lower than they have been historically. They include limits on Medicare payments and other cost-containment elements of the Affordable Care Act.

"My own personal sense is that at the moment, the race is being won by the cost savings more than the cost increasing," Cutler says.

And he says that's led him to believe there's a real chance that the country's long-term finances can be brought under control.

"If we see cost increases remain as low as they are now, the health care problem would go from something that we have no idea how to address into something that we could address along the lines of Social Security," Cutler says.

And there's broad agreement that Social Security could be made solvent with a mix of relatively small tax increases and benefit cuts. But Antos is less optimistic that health care cost increases have been reined in enough to significantly reduce the threat of long-term budget deficits.

"I think it's possible. I hope it's true. I think it's too early to know," he says.

Antos points to a recent report from the Centers for Medicare and Medicaid Services, the official arbiters of health care cost projections. It says more evidence is needed before concluding that health care cost increases have moderated for the long term.