There has been an ongoing slowdown in the growth of healthcare costs during the last several years, and it’s contributing somewhat to reducing the deficit. According to The New York Times, the Congressional Budget Office (CBO) has been able to knock hundreds of billions of dollars off of its past projections for spending on Medicare and Medicaid.
Experts aren’t completely sure why this is occurring, or why it’s been persistent. The data shows that this trend actually began before the recession, and is continuing despite economic recovery. They point to changes in how hospitals and clinics are delivering their care, attempting to reduce wasteful and unnecessary treatment; and the fact that some insurers have switched to paying for care delivered, instead of the fee-for-service care that we’re all used to.
Medicare affects the federal deficit primarily through its medical insurance program (Medicare Part B), which is financed by general revenue rather than through the trust fund. But back in 2010, Medicare alone accounted for 12% of the federal budget and was projected to continue to eat up larger slices of the budget pie as more of the Boomer generation retired. Douglas Holtz-Eakin, former head of the CBO, said at the time, “If you look past the next eight to 10 years, Medicare is the deficit problem. And there’s simply no way we can address our fiscal problems without coming to terms with Medicare’s future.”
When the Affordable Care Act was put into place, it sought to reduce Medicare spending by $716 billion over 10 years. These cuts come from reducing payments to hospitals, and trimming down Medicare Advantage payments. An article published by The Washington Post during the election cycle mentions that while Medicare Advantage sought to provide affordable private insurance to senior citizens by footing the bill for them, what actually happened was that their costs went up much higher than the average fee-for-service cost, driving a lot of the current spending. The $716 billion in savings, however, is intended to help fund the rest of the ACA, rather than going directly towards bringing down the deficit.
This unexpected slowing of the growth of healthcare costs is not going to address the entire deficit either. While it is the biggest contributor to the growth of all federal assistance programs (which includes housing assistance, tax credits, etc.), the entire group of programs has grown more than tenfold over the last 40 years, mostly due to an increased number of people on various assistance programs and an increase in spending on each of those people.
When considering the deficit, it’s important to understand that the need to borrow is not necessarily specific to a few programs, the highest-funded departments, or what’s deemed “least necessary” by one group or another. Instead, borrowing helps to meet future expenditures of a wide range of activities, departments and programs that are paid for out of general revenues. Deficit reduction, then, comes from either making cuts to everything, which could have a potentially drastic, negative effect on the population, or it comes from making tough choices about what is unnecessary. Unfortunately, Congress cannot agree with each other or with the White House on just what is unnecessary.
In 2012, just over 60% of the federal budget went to national defense/international security assistance (20%), Social Security (20%), and Medicare/Medicaid and CHIP (21%). These are percentages of the overall budget, not the percentages each program takes out of general revenue. For instance, Social Security might be 1/5th of the federal budget, but is financed mostly through the payroll tax and only gets small amounts of its funding from general revenues. Thus, it does not contribute in any significant way to deficit spending. Defense spending, however, comes entirely out of general revenues, and while it is important to have a strong military, “strong” and “large” are two different things. Our military needs to be smarter, not larger.
So, since Medicare may be a good-sized chunk of the total federal budget, and receives a lot of financing from general revenues, this unexpected slowing in growth is only a tiny slice of true deficit reduction, though it’s certainly a welcome slice. Ideally, Congress won’t seize on that as a possible solution to the overall problem.