Opinion: Can We Afford All This Healthcare Spending?

Healthcare Basics: A series that details the fundamentals of Medicare and Medicaid, two costly programs that play a critical role in keeping millions of Americans healthy

Credit: Amanda Brown
Richard F. Keevey
Fifty-four years after Medicare and Medicaid were established, our nation is rapidly approaching a crossroads in how we provide and pay for these government programs that are critical to the health of millions of elderly, disabled and poor Americans. This is the last in a four-part series by Richard F. Keevey, the former budget director and comptroller for New Jersey, breaking down the complicated issues, explaining what the programs are and whom they serve, how they came to this juncture and where they are headed. Keevey also suggests steps that could be taken now to forestall a crisis. Today’s focus: A way forward. Follow these links to read Part One, Part Two and Part Three.

So far in this series, we’ve commemorated the 54th birthday of Medicare and Medicaid; discussed major aspects of each program; recognized the very significant impact they have on healthcare and finally called for the expansion of the ACA (Obamacare) to provide care for the uninsured in New Jersey and the country.

Each section made note of the rising costs of these programs and offered the observation that some action is needed to address the deficits associated with federal spending.

The fiscal challenges posed by both programs come at the same time that Social Security, the largest federal program, is also facing financial uncertainty. (In an earlier NJ Spotlight column, which also proposed solutions, I indicated that by 2034 only 79 percent of projected benefits would be funded because of rising costs and dwindling contributions.)

So, the obvious question becomes: What are our future finances and can we afford all of it? As residents of New Jersey we receive a lot less federal support then we pay in taxes, so the impact of rising federal deficits could affect us even more than residents of other states.

Spending and revenues

According to the Congressional Budget Office, federal spending for fiscal year 2019 will be $4.4 trillion. Revenues are projected to be $3.5 trillion, resulting in a deficit of $900 billion — almost twice the amount in FY2016. The CBO projects the annual deficit will grow to $1.3 trillion over the next nine years.

The current gross debt (the accumulation of all previous deficits) is $22.4 trillion — over 103 percent of gross domestic product, or the total value of all goods produced and services provided in the country in a year. CBO projects the total debt will be $34 trillion in FY2028 — give or take a few trillion.

Federal spending can be summarized as follows:

  • $1.8 trillion, for Social Security and Medicare, the two largest “mandatory programs”;
  • $690 billion, for defense;
  • $405 billion, for Medicaid;
  • $500 billion, an estimated total for other “mandatory” programs (as categorized under federal rules) — including food stamps, Supplemental Security Income, child nutrition, military retirement and agriculture subsidies;
  • $380 billion, for interest payments on the national debt;
  • $640 billion, for everything else, including transportation, education, the EPA, the IRS, the FBI, criminal justice and myriad other programs.
  • The source of federal revenue is relatively simple, with 85 percent coming from the individual income tax and the so-called payroll tax, which goes chiefly for Social Security and Medicare. Taxes on corporations make up 7 percent of total revenue and the remaining 8 percent comes from a mix of miscellaneous taxes and fees, such as the estate tax, the gasoline tax and other excise taxes.

    State and local governments, on the other hand, collect revenues from levies on property, income, sales, corporations and a wide range of other sources, including insurance companies, utilities, motor fuels and fees, lotteries, casinos, etc.

    Future problems

    It does not take a genius to know that we face a problem — assuming we accept the thesis that a mounting debt is not good for our country in the long run, especially if the economy stumbles, which it will at some time.

    Now, there are some that argue deficits and debt do not matter and still others who say we need a new economic model where the Federal Reserve is nationalized, commercial borrowing is minimized and Washington doesn’t have to pay market-based interest rates on its debt.

    But let’s assume the current system is maintained. Then we must address the deficit and debt problem. There are only three broad options — increasing revenue (a.k.a., raising taxes), reducing spending or a combination of both.

    Absent any wholesale changes, we will need at the very least to increase the payroll tax to fund Social Security and Medicare Part A, as both will come up short in revenue in a few years.

    Also, if folks agree that healthcare should be made available for the uninsured (seems reasonable to me) we need more resources. We certainly can make efficiency and program savings, but realistically that won’t come close to filling the gap.

    There are some who argue we spend too much on the military (now 16 percent of the budget), but we live in troubled times and the United States has necessary global responsibilities. Some reductions can be made — the recent sharp increases in military spending certainly could be slowed — but again, that comes nowhere near what would address the debt problem.

    Some basic ideas

    First-rate research has been done on this subject. Two reports in particular — the “National Commission on Fiscal Responsibility and Reform,” also known as “Simpson-Bowles” after its bipartisan chairmen, and “Restoring America’s Future,” similarly known as “Rivlin-Domenici” — contain great ideas and solutions.

    On the revenue side, the recent changes in federal tax law under the “Tax Cuts and Jobs Act of 2017” exacerbate the problem, such that projected debt is greater than it otherwise would be.

    Systematic and fair tax reform will be a complex, lengthy, and politically difficult effort. But there are some changes that can make a significant difference.

    Some examples:

  • Restore the higher rate and lower the taxable base on estates;
  • Tax capital gains as ordinary income;
  • Eliminate most of the tax credits and deductions in the tax code for corporations and individuals. These are worth approximately $1.5 trillion annually and generally benefit the wealthy;
  • Consider a simple and workable wealth tax.
  • We also have work to do on the spending side. We could, for instance, save money on Social Security by extending the retirement age and by increasing the base on which the wage tax is applied.

    However, by far the largest spending area is for healthcare, as Medicare and Medicaid represent 25 percent of all federal spending. The largest factors affecting health spending are an aging population and relentlessly increasing medical and pharmaceutical costs.

    Supply-side inefficiencies include the fee-for-service structure which incentivizes volume over quality and a fee schedule which provides much larger payments to specialists than primary-care physicians.

    On the demand side, certain services under Medicare are provided at an excessively low cost to beneficiaries, which incentivizes the use of services more than is needed. A shift toward so-called value-based design is needed — meaning the level of cost sharing should be dependent on the medical value of service. Individual cost-sharing would be low for high-value services but high for low-value services.

    Medicare reforms are important as it is the principal driver of future federal costs and also because the program encompasses a big enough share of the American healthcare market to sway the entire health delivery system.

    Other cost savings that must be addressed include long-term care. Medicaid supports over 60 percent of all nursing-home residents and 40 percent of all the money spent in the nation on long-term care. We need to fund more home-health oriented programs to keep folks out of the nursing homes, which is much more humane and much less costly.

    And, of course, the cost of pharmaceutical drugs is a dominant cost center for both Medicare and Medicaid — and begs for change.

    All these subjects are controversial but need attention if we are to carve back spending.

    Final observations

    To be sure, the deficit/debt issues are politically charged. Some legislators never want to increase taxes and many in fact want to cut taxes; others think safety-net programs must continue as presently structured. Both views are flawed.

    All is not good for the finances of our country. In fact, the recent budget agreement only makes the problem larger. The recommendations here would have a big impact and improve fiscal responsibility. The solutions must be a combination of taxes and altering the current safety-net programs and defense spending. Others might have a different approach or a set of other recommendations, but my guess is they would not be radically different.

    Change will not come easily and this column only hints at the political feasibility. But moderate reforms today are more effective than drastic reactionary changes in the future as the problems will continue to grow.

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