The Long-Term Budget Outlook in the United States and the Role of Health Care Entitlements

1. Conference on the Long-Term Fiscal Crisis University of Southern California January 2010 The Long-Term Budget Outlook in the United States and the Role of Health Care Entitlements Presented by Donald Marron Georgetown Public Policy Institute Based on the conference paper by Joyce Manchester Jonathan A. Schwabish Congressional Budget Office The views expressed in this presentation are those of the authors and should not be interpreted as those of the Congressional Budget Office.

2. Motivation • In the absence of significant changes in policy, rising costs for health care will cause federal spending to grow much faster than the economy, putting the federal budget on an unsustainable path. • By 2035, CBO projects that the share of total government spending for health care will more than double to about 13 percent of GDP, up from about 6 percent of GDP in 2008. • CBO projections indicate that federal debt will continue to grow much faster than the economy over the long run.

3. The Congressional Budget Office Budget Estimates • The Congressional Budget Office (CBO) has prepared budgetary projections through 2080 under two different sets of assumptions about federal laws and policies. • Extended-Baseline • adheres most closely to current law, following CBO’s 10-year baseline budget projections for the next decade and then extending the baseline concept beyond that 10-year window. • Alternative Fiscal Scenario • represents one interpretation of what it would mean to continue today’s underlying fiscal policy. This scenario deviates from CBO’s baseline even during the next 10 years because it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past.

4. Total Spending for Health Care Under CBO’s Extended-Baseline Scenario

5. Federal Revenues and Noninterest Spending, by Category, Under CBO’s Extended-Baseline Scenario

6. Federal Revenues and Noninterest Spending, by Category, Under CBO’s Alternative Fiscal Scenario

7. Three Reasons That the Fiscal Challenge Is Especially Acute • Current policy as perceived by many people would generate much larger deficits than current law as captured in CBO’s baseline. • Federal debt is already very large relative to GDP by historical standards. • Population aging and rising health spending will continue to push up federal spending under current law.

8. Federal Debt Held by the Public as a Percentage of GDP

9. Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security

10. Federal Fiscal Imbalance Under CBO’s Long-Term Budget Scenarios

11. Longer-Term Budget Projections • CBO’s Long-Term Model • Social Security • Medicare and Medicaid • All other spending generally grows with GDP • Taxes • Limitations of Long-Term Projections • Uncertainty, especially for health programs • Interaction with macroeconomic conditions • Value of Long-Term Projections • Highlight trends • Provide baseline for policy changes

12. Rising Health Care Spending Excess Cost Growth, in Percentage Points

13. Excess Cost Growth in Spending for Health Care

14. Assumptions About Excess Cost Growth in Spending for Health Care Over the Long Term

15. Policy Options That Could Produce Budgetary Savings in the Long Run • Create Accountable Care Organizations • Bundle Payments to Hospitals and Other Providers • Provide Additional Information About Treatments’ Effectiveness • Expand the Use of Preventative and Wellness Services and Primary Care • Increase Cost Sharing by Patients • Modify the Tax Treatment of Employment-Based Health Insurance

16. Imposing Ongoing Pressure to Increase Efficiency in the Health Care System • Reduce Annual Updates in Medicare’s Payments to Reflect Expected Productivity Gains • Reduce Medicare Payments in Higher-Spending Areas • Combine Increased Discretion to Change Medicare with a Fallback If Savings Were Not Obtained • Limit the Growth of Medicare’s Subsidy of Premiums