In the 1990s, we had ostensibly serious budget debates aimed at avoiding a bleak future where deficits soared to infinity or taxes ate up all our income. Private equity billionaire Peter Peterson has provided much of the fuel for these debates. His money has supported austerity advocacy groups like the Concord Coalition and the Committee for a Responsible Federal Budget. He also wrote several books that were deficit fear classics, such as Will America Grow Up Before It Grows Old: How the Coming Social Security Crisis Threatens You, Your Family, and Your Country.
As some of us pointed out at the time, the heart of the scare stories of the austerity gang was not actually social security or an aging population, but rather projections of rapidly growing costs per capita health care continuing for many decades. This rapid growth was expected for both public and private sector costs.
If health care costs really followed the predicted growth path, it would devastate the economy, whether we paid for them through public programs like Medicare and Medicaid, or through private health insurance and out-of-pocket expenses. . (Per capita spending on public programs was actually growing less rapidly in public sector programs than in the private sector.) The real problem had nothing to do with the government budget, it was fixing the health care system.
Either way, there’s actually a good story here that’s gotten a lot less attention than it deserves. Health expenditure has not increased as rapidly as expected. I previously did an article showing that healthcare spending has actually declined as a percentage of GDP since the pandemic. I decided to go back to 2000 and show the longer term picture.[1]
As can be seen, the share of GDP devoted to health care rose sharply in the first three years of the century, rising from 13.6% at the start of the century to nearly 16.0% in 2003. then stabilized until the onset of the Great Recession, when it jumped again, reaching 17.5% of GDP in 2009. It then stabilized for several years, after the introduction of Obamacare, before back up to 18.6% in 2016. Since then it has changed little, until it fell sharply following the pandemic. In the last quarter, it was only 17.6% of GDP, roughly the same share as in 2009.
It was vastly better than what was screened in the days of Peter Peterson’s Scary Stories. In fact, it was even much better than the Congressional Budget Office (CBO) projected in 2009. The CBO’s long-term budget projections from 2009 showed that health spending would represent 33.1% total consumer spending by 2022 (Table F2-2). In fact, my calculations (adjusted for the 0.8 percentage point discrepancy with the CMS) show that health expenditure is only 24.8% of current consumption expenditure.
The gap between the CBO’s 33.1% consumption projection and the actual 24.8% equals more than $1.45 trillion on an annual basis. This amounts to $11,800 per family each year. Compared to the projected growth trajectory of healthcare spending 13 years ago, the average family has an additional $11,800 per year to spend on items other than healthcare.
It is enormous. After all, we’ve been told by the media that families have been devastated by inflation that has outpaced wage growth by less than 1% since the pandemic began. Imagine how they would feel if they paid $11,800 more per year for health insurance or personal expenses.
We may wonder why the growth of health care spending has slowed so sharply. The Affordable Care Act certainly played an important role. The post-pandemic slowdown may reflect a shift to more telemedicine and home diagnostic testing. (Use of therapy equipment has exploded in recent years.)
This slower growth may reflect a deterioration in the quality of care. If so, we should see this in measures of health outcomes over time. Nor should we fool ourselves into thinking that our health care system is now very efficient. We still spend far more per person than any other wealthy country and more than double that of countries like Canada and France.
But, we’ve been dodging the healthcare horror story that was projected in the 1990s by the Peter Peterson gang and more recently by CBO. And that is very good news.
Remarks:
[1] These numbers are slightly higher than what the Centers for Medicare and Medicare Services (CMS) reports for healthcare spending as a percentage of GDP. They showed a figure of 17.6% for 2019 (the last year for which data is available), while my calculations amount to 18.4%. I suspect this is due to double counting, where I may have government health spending, which also shows up as consumption. For those who want to check, I added rows 64, 119, 170 and 273 from the NIPA 2.4.5U table and row 32 from the NIPA 3.12U table. These are therapeutic equipment, pharmaceuticals and other medical products, health care services and net health insurance. Line 32 represents government spending on Medicaid and other health care benefits. Although the level is somewhat higher than indicated by the CMS data, it can be assumed that the changes over this period follow the changes measured by the CMS quite closely.
This first appeared on Dean Baker’s Beat the Press blog.
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