James Pethokoukis

Politics and policy from inside Washington

What healthcare reform 2.0 might look like

Dec 16, 2009 13:57 UTC

Let’s assume, for the moment, that the latest version of the shape-shifting U.S. healthcare reform legislation may not worsen U.S. finances in the short term. But do the deficit math, and it doesn’t reduce long-term spending enough. The curve won’t get bent.

The proposed legislation would reduce the U.S. budget shortfall by a cumulative $100 billion or so over the next decade compared with the current baseline forecast, according to the Congressional Budget Office (CBO).  And in the decade beyond that, the changes would reduce federal budget deficits by about one-quarter percent of GDP against the no-reform case.

For the long term, though, that’s not nearly enough. Budget deficits are likely to average somewhere near $1 trillion annually over the next decade, with long-term structural deficits of at least 7 percent of GDP (maybe much more), which is currently $14.3 trillion.

By comparison, the post-World War Two average deficit in the United States is 2 percent of GDP. Healthcare costs are currently projected to account for roughly half of total government spending, or nearly a quarter of GDP, over the coming decades.

To narrow the deficit, healthcare spending cuts would therefore need to be substantial. Unfortunately, the reforms currently envisaged don’t contemplate that kind of surgery. For instance, the money saved from big cuts in Medicare, the U.S. government’s post-retirement healthcare program, is earmarked for expanding coverage rather than reducing overall costs. Yes, the Senate bill is filled with all manner of pilot programs means to change the healthcare payment system and the incentives it creates for overuse of pricey premium. But whether these programs will eventually blossom is pure guesswork.

Here’s what isn’t guesswork: Pressures will eventually mount, whether from creditors of the United States or, if successive governments choose to print money to fund their deficits, from citizens weary of inflation. It’s hard to see how hefty healthcare cuts could then be avoided.

But maybe such a crisis will finally prompt some smart policy that moves America away from an unaffordable,  central planning approach. One possible result might be a healthcare system with a minimalist public safety net and lots of add-ons paid for by users. Or perhaps a more market-driven fully private insurance system with government subsidies for the poor. The CBO has actually scored approaches like these and found that they could help close the long-term budget shortfall, reducing total long-term government healthcare spending by half from current projected levels.

Unfortunately, today’s reforms are just kicking the cost problem down the road. It will be the next round of healthcare reform that has to explore more radical options.

COMMENT

By the time this healthcare legislation passes there won’t be anything left in it worth passing.

Posted by Laz | Report as abusive

Ben Bernanke, 2009 Person of the Year

Dec 16, 2009 13:37 UTC

Or so says Time. With the vast array of unprecedented Fed actions, it is hard to argue with the selection.  But this might not be Bernanke’s last selection if inflation picks up. Remember, the award goes for the person who had the most impact, for good or ill.

COMMENT

too true. remember Time’s 1938 man of the year? That ‘stache was all the rage.

Posted by Bill York | Report as abusive
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