Busting the Budget: Healthcare Costs or Entitlement Programs?

What is the Real Fiscal Challenge?

On Monday, September 15th, six experts in fiscal policy and healthcare policy debated the nature of the nation’s pending fiscal crisis at the National Press Club. Moderated by TaxVox editor Howard Gleckman, the event featured Henry Aaron and Alice Rivlin of the Brookings Institution, Julie Barnes and Maya MacGuineas of the New America Foundation, Robert Greenstein of the Center for Budget and Policy Priorities, and Eugene Steuerle of the Peterson Foundation.

Henry Aaron warned that long-term deficit projections would be unsustainable, but argued that two questions must be answered: what causes these deficits and what should the solution be? Although the answers need not be the same, Aaron explained that healthcare cost growth is both the primary driver, and should be the primary solution. He offered 5 conclusions:
  • Projected deficits are large and unsustainable.
  • Spending cuts and Social Security reform can help reduce them a little bit, and should be undertaken.
  • Healthcare spending, and the taxes needed to pay for them, should continue to grow faster than GDP.
  • Healthcare cost growth can be slowed considerably, greatly reducing the projected deficit.
  • The problem of future deficits is not an entitlement problem, but a problem of large and growing costs in the overall healthcare system.
Maya MacGuineas agreed that continued deficits would be unsustainable because they would hamper economic growth, reduce intergenerational fairness, and inhibit budget flexibility. She pointed to areas of agreement between the panelists, explaining that they each believed the deficit is projected to grow to unsustainable levels, and healthcare is a key driver of that growth. At the same time, MacGuineas warned about focusing entirely on healthcare cost growth since there still doesn’t exist much knowledge of how to sufficiently reduce healthcare costs to close the fiscal gap, and where there does, there is little political will. Given this reality, MacGuineas suggested the next President focus on a budget deal for the short-term, a comprehensive fix to Social Security, and “round one of healthcare reform.” Since we will inevitably spend more on healthcare as society gets older and richer, she explained, the solution must focus on all areas of the budget.
Julie Barnes spoke next, explaining that healthcare costs are the major reason that the budget is unsustainable. She took issue with both the argument that we do not know how to reform healthcare costs and that healthcare reform is politically unviable. Barnes pointed to studies which have shown that roughly one third of healthcare spending adds little or no value, and reducing just 10% of that waste a year would offer tremendous savings. She pointed to payment reform and care coordination as proven tools to help deliver healthcare more efficiently and at a lower cost. She also explained that both Presidential candidates have plans to reduce healthcare costs considerably, that both houses have strong bi-partisan healthcare reform plans, and that many of the major stakeholders are now in agreement on much of what has to be done.
Alice Rivlin then suggested that the panelists were in fact debating the wrong question. Rather than arguing over whether closing the fiscal gap should focus on entitlements reform or healthcare reform or tax reform, they should recognize that all three are important. Rivlin explained the there are really two problems driving entitlement growth – demographics and healthcare cost growth. Because of demographics, Social Security costs will rise rapidly over the next two decades and then begin to level off. Medicare and Medicaid, on the other hand, will rise steadily indefinitely. This means that Social Security is important in the short-term, while healthcare entitlements drive the deficit further into the future. Rivlin suggested five main solutions to the looming fiscal crisis:
  • Encourage people to work longer by both reforming Social Security and changing rules and incentives in private pensions.
  • Encourage more efficient distribution of medical care, using Medicare and Medicaid to lead payment system reform.
  • Move toward universal healthcare coverage with spending controls.
  • Shift healthcare expenses to the private sector where possible.
  • Reform the tax code to make it more equitable and efficient so that it can bring in the needed revenue without being overly burdensome to the economy.

Bob Greenstein agreed with Rivlin that no either-or situation exists, and made four points of his own:
  • There is no general entitlement crisis, and in fact all entitlements besides Medicare, Medicaid, and Social Security are shrinking.
  • Tax entitlements for healthcare and retirement need to be addressed.
  • Revenue matters, as evident by the fact that renewing all the Bush tax cuts is three times as expensive as reforming Social Security.
  • Healthcare cost growth is the single most important factor driving the fiscal situation.

Greenstein suggested that reforms to Medicare – such as higher premiums for the wealthy and many of the payment reforms suggested by MedPac – could be adopted, but they would close only a small part of the nation’s long-term fiscal gap. Social Security, spending, and tax reform might also help, but will be woefully insufficient. Therefore, he explained, it is impossible to solve the nation’s fiscal problems without slowing the overall growth in healthcare costs.

Gene Steuerle spoke last, arguing that “never before in history has so much been committed for so many people, so far into the future.” Ultimately, he suggested, allowing Medicare and Medicaid costs to grow automatically is a democratic issue – with previous generations taking decision-making away from current voters. Steuerle warned that we have considerable resources now pledged to “middle aged” retirees, since we have failed to redefine the elderly in light of increasing life expectancy. By continuing to retire in our early 60s, he suggested, we are not only driving healthcare costs upward, but also decreasing the number of tax payers (and amount of revenue), and slowing GDP growth. Turning to the healthcare system, Steuerle suggested perverse incentives encourage acute care over preventative care and more surgeons over more primary care doctors. He explained that he was not advocating less entitlement or healthcare spending, but rather arguing that we should make explicit decisions about how resources are allocated.
Howard Gleckman asked the panel what reform should be undertaken first. Rivlin suggested that policy makers should first use Medicare to “lead the way” toward more effective evidence-based care. Aaron agreed, but also believed that both candidates were proposing far too much in tax cuts, and should allow many of the Bush tax cuts to expire as scheduled in 2010. MacGuineas suggested that policy-makers should do whatever is most politically opportune at the time, but should push for as much change as possible since reforms tend to come in waves. Barnes suggested that politicians could build confidence from the voters and each other by first engaging in easy health reforms, such as the renewal of SCHIP, which would cost the federal government additional money. Greenstein believed that politicians should start by developing the infrastructure to make future healthcare reform possible (such as better Health IT), and cutting subsidies to Medicare Advantage. And Steuerle suggested the next President change the entire focus of government and point it toward long-term budgeting.
Gleckman then asked how much healthcare waste is really out there. Aaron explained that while there is some pure waste, most of what should be considered waste does have “some benefits for some people some of the time.” This makes it politically difficult to reduce waste – although we need to reduce high-cost low-benefit care. Barnes followed by explaining that one third of healthcare spending is on waste – roughly 5% of GDP. She pointed to payment reform and medical homes as a way to cut that waste. Steuerle suggested that the best way to reduce waste would be to put healthcare spending under some type of budget constraint. And MacGuineas warned that in an issue as complicated and personal as healthcare, it will be hard to identify waste – so we shouldn’t look at it as a free lunch.
The next questioner asked how the American people could be educated about the high cost of healthcare, and the “lousy results” we get in the United States. Aaron suggested that explaining these issues to the public would be difficult, and the focus should be on getting the elites to understand and push for solutions. Steuerle suggested that the smartest thing to do would be to change the defaults so that politicians could provide winners by increasing benefits and payments relative to what would happen automatically, rather than decreasing them.

Senator John Breaux next asked if comparative effectiveness research was worthwhile if it was only based on finding the highest quality care without concern for cost. Rivlin suggested that evaluating treatments on the basis of cost effectiveness was very important. Barnes agreed that cost and health outcomes both matter, but suggested that the latter was more important. Aaron warned that even with comparative effectiveness research in hand, it would be very difficult to ban ineffective or overly expensive care, but that we can use comparative effectiveness research to change incentives.

Howard Gleckman then asked whether there should be any types of caps on healthcare spending. Greenstein suggested that global healthcare caps would be impossible without single-payer healthcare, and a cap only on Medicare would be unsustainable as long as private healthcare costs continued to grow. MacGuineas argued that patient incentives need to give individuals a better idea of how things cost, with different amounts of cost sharing depending on the necessity of the treatment or procedure.

The final questioner suggested that entitlement growth represented a case of irresponsible spending. Steuerle agreed, arguing that the solution was not necessarily to cut public spending, but the budget for healthcare spending explicitly. MacGuineas agreed, suggesting that our baselines need to change to let politicians “spend more” rather than taking benefits away. She went further, expressing that the fundamental principle of governance should be that if you are going to spend more, you need to find ways to pay for it. Although this wouldn’t solve the problem, she suggested, it would stop things from getting worse. The bottom line, she explained, is that “if we are going to spend more on healthcare, we have to pay for it.”

-Marc Goldwein, Policy Analyst for the Fiscal Policy Program 
National Press Club, Holeman Lounge
529 14th Street NW
Washington, DC, 20045
  • Henry Aaron
    Senior Fellow, Economic Studies, Brookings Institution
  • Julie Barnes
    Deputy Director, Health Policy Program, New America Foundation
  • Robert Greenstein
    Executive Director, Center of Budget and Policy Priorities
  • Maya MacGuineas
    Director, Fiscal Policy Program, New America Foundation
    President, Committee for a Responsible Federal Budget
  • Alice Rivlin
    Senior Fellow, Economic Studies, Brookings Institution
  • Eugene Steuerle
    Vice President, Peter G. Peterson Foundation
  • Howard Gleckman
    Senior Research Associate, Urban Institute
    Editor, TaxVox