Featured Research

The National Budget Problem

If one believes that the United States’ budget deficit is too large or if one is concerned with the rise in the size of the outstanding U.S. public debt — and if one is unwilling or unable to significantly increase revenues — then one has to control or reduce the rise in health care spending that has driven the expenditure side of the budget over the past decades. In short: to the extent that the United States budget has a spending problem, it has a health care spending problem.

Spending on federal programs is controlled in three general ways. Traditional programs — labeled Discretionary Programs — require an annual appropriation. This appropriation (most often contained in one of the 13 Annual Appropriation Bills) grants legal authority that allows an entity (most often in the bureaucracy) to enter into a contract. These contracts are referred to in budget jargon as Obligations. When these contracts are fulfilled the government makes a disbursement. The sum of those disbursements over an accounting period — let us say the Fiscal Year — are referred to as Outlays. While all disbursements require a grant of Budget Authority — budget authority is increasingly granted via a formula contained in the basic authorizing statute of the program, rather than an annual appropriation. This type of spending is labeled Mandatory Spending. To control the amount of spending (outlays) of these Mandatory Programs, the Congress has to change the formulas in the basic authorizing statutes of these programs. Just to make things more complicated, there are a few Mandatory Spending programs (Food Stamps and Medicaid for example) whose spending is governed both by a formula and by an annual appropriation. These programs are often labeled Appropriated Entitlements. In most cases these are means-tested programs that provide benefits for the poor.

Approximately one half of Discretionary spending is for defense programs and one half for domestic programs. Pure Mandatory Programs provide non-meanstested benefits. Although the oldest mandatory program is the commitment to pay the interest on the public debt, since the New Deal what are often called the middle class mandatory programs (or entitlements) have come to dominate U.S. federal budget spending. The largest of these is Social Security, closely followed by Medicare and Medicaid (an appropriated mandatory program).

It is often claimed that the aging of the U.S. population is driving the amount of outlays for the large mandatory programs. This is the case for Social Security spending but not totally true of the two large health care programs — Medicaid and Medicare. Although the aging of the population has affected these health care programs, the major factor driving health care spending has been the rise in health care costs above the general inflation rate (referred to as health care inflation).

The U.S. Health Care Spending Problem

Students of public health and health care generally begin their analysis of the health care system by looking at three outcomes of any system: To what extent does it provide access to its citizens? What is its cost? And what is the quality of the service provided by the system? cost: Just under half of all U.S. health care spending occurs in the public sector. One might be tempted to blame the inefficiency of the public sector for the growth in health care spending in excess of GDP growth. Unfortunately, the entire U.S. health care system has not been able to control health care costs. In 2008 the United States spent 16 percent of its GDP on health care. Among industrial democracies the next largest percentage is found in France, which in 2008 devoted 11.2 percent of its GDP to health care.

Moreover, as seen in the Kaiser Family Foundation figures, the rate of growth of health care spending has been more rapid in the United States than in other comparable countries. access: Currently over 16 percent of Americans do not have health insurance. And many studies have shown that those without health insurance have poorer health status than those with insurance. Quality: It is also the case that for all the resources devoted to providing quality health care, positive health care outcomes are not that high in the United States. Thus according to the CIA World Fact Book (2011 estimates), the U.S. ranks 34th among UN member states in terms of life expectancy at birth. For years defenders of the U.S. Health Care system pointed to the superb quality of U.S. Medical Schools, research centers, and teaching hospitals.

Although international comparisons are not available, recent studies of health care quality by scholars such as Dean Steven Shortell of the UC Berkeley School of Public Health have called into question the quality of health care in the United States. 

The Goals, Promise and Future of the Affordable Care Act

The main legislative achievement of the first two years of the Obama Administration was the passage of the Affordable Care Act (ACA). It is clear that the main goal of the ACA is to significantly reduce the number and percent of Americans who lack health insurance. Most observers think that it will be successful in this effort. It will do so by dramatically increasing the Medicaid program and by eventually implementing an individual mandate requiring most firms and individuals to obtain health insurance or pay a fine (tax). Lower income individuals
and small businesses will receive a subsidy to allow them to afford insurance. Taxes will be raised to cover most of the costs of this subsidy. It is not clear, however, whether the ACA will significantly reduce national health care expenditures. The ACA requires a series of changes — most notably the creation of the Independent Payment Advisory Board (IPAB) and health care exchanges that are aimed at using market forces to control costs and to increase quality. Another major goal of the ACA is to move from fee-for-service to another payment method — most likely capitation. Many of the other ACA provisions are aimed at improving the quality of medical care. The required Health Exchanges are aimed at providing increased choice to consumers so that they can choose among various plans to meet their needs.

A key little-noticed provision is that if the new system fails to control costs, the IPAB is given the power to limit services and/or providers. (These actions can be overturned by Congressionalaction.) In effect, this will dramatically increase the regulatory power of the national government. At this point, the charge of rationing will emerge.

Will This Work?

As indicated, there is general agreement that the ACA will increase the percentage of Americans with health insurance. There is also wide agreement — based on the experience of other countries that have reformed their health care sectors — that once this occurs, health care costs will explode. The United States traditionally has attempted to use market forces to increase efficiency as a way to control or lower costs. This is rarely the case in other countries. It is not the case that other countries have always relied on a national health system (as in the United Kingdom) or a single payer system (as in Canada) to control costs. But it is the case that in every other country that has seriously controlled costs, the regulatory power of the State has increased and been used. Thus, Germany and Switzerland do not have single payer or a national health insurance systems — but they do have a highly regulated health care sector. What is rarely discussed is the fact that the U.S. health care sector now accounts for over 16 percent of GDP (and some estimates have the figure as high as 18 percent of GDP). In one study of why the US system is so much more expensive than that those of other large industrial countries, several scholars have pointed to “the prices” — namely that almost everyone — doctors, nurses, technicians, etc — in the U.S. system makes more money than they would in the health care systems of
other OECD countries.

From a political perspective it is unlikely that these individuals will give up their “good life” without a fight. Some economists, such as last year’s Aaron Wildavsky lecturer David Cutler, believe that market forces will force a change. But this has yet to happen. So eventually we are likely to have a fight between market and political forces.

John Ellwood is Professor of Public Policy.