Health costs increase despite recession

The latest one- and ten-year outlook for health care spending from
the Center for Medicare and Medicaid Services projects health care
spending growing 50 percent faster than growth in the overall economy.
By 2018, health care will account for fully one in every five dollars
of gross domestic product, according to the projection. The biggest
jump in health's share of economic activity will come in the next two
years as the sector continues to grow while the rest of the economy

And that's the good news.

There were several unrealistic assumptions built into the
projections. First, the CMS economists assumed Medicare's physician
payments will be cut by 20 percent at the end of next year when the
current payment fix expires. As anyone who follows that issue closely
knows, that never happens. Congress always steps in and restores the

The second major assumption was that health care expenditure growth
will average around 6.2 percent per year over the next decade, which is
about equal to last year, the slowest growth in the past decade. It's
possible, but only if some form of health care reform is enacted, and
the reforms include an effective health care cost containment strategy.
That's a lot of ifs.

One eye opener in the data, which was published on the Health Affairs
website, was the increasing role that public sector finance plays in
health care. All public sector programs — Medicare, Medicaid, public
health, the Veterans Administration, etc. — will surpass half of all
health care spending in 2016, according to the projection, and reach
51.3 percent by 2018. When you subtract individual out-of-pocket
spending from the total, what's covered by private insurance will
shrink to about a third of spending.

The projections serve as an interesting backdrop to yesterday's
fiscal summit organized by the Obama administration, which wound up
focusing almost exclusively on health care as the "entitlement"
problem. That's accurate. Social Security is a paragon of fiscal health
compared to Medicare and Medicaid. Peter Orszag, the chief of the
Office of Management and Budget, told the forum that "the path to
fiscal responsibility must run directly through health care."

So here's my prediction: Based on my reading of the Congressional
Budget Office health care "options" report issued last December, the
Obama administration will make a move toward putting budget caps on
Medicare and Medicaid spending sometime during his first term.

Everyone knows there is a tremendous variation in utilization around
the country and the system everywhere deploys a tremendous amount of
wasteful medical procedures, tests, drugs, devices, and durable medical
equipment. Comparative effectiveness research, properly deployed, is
one way to wean the system from wasteful expenditures. That's the
scientific carrot.

But budget caps are the fiscal stick. If officials knows that
spending can't go over a certain level, they will be forced to make
decisions about what constitutes high quality, affordable care. That's
how it's done in other advanced industrial countries grappling with
aging societies and skyrocketing health care costs.

Merrill Goozner has been writing about economics and health care for many years. The former
chief economics correspondent for the Chicago Tribune, Merrill has
written for a long list of publications including the New York Times,
The American Prospect and The Washington Post. His most recent book,
"The $800 Million Dollar Pill – The Truth Behind the Cost of New Drugs
" (University of California Press, 2004) has won acclaim from critics
for its treatment of the issues facing the health care system and the
pharmaceutical industry in particular. You can read more pieces by Merrill at, where this post first appeared.

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3 replies »

  1. I came across this webcast ‘Green Data Centers: A Way for the Public Sector to Lead by Example” which is now available on demand.
    This is designed specifically to help people in the government, education and healthcare industry learn about implementing green data centers in their organizations. It tells how energy efficient data centers can help reduce energy consumption, cooling, and operational costs while improving business services, growth and sustainability.

  2. I too understand the need for a budget, we are never going to get out of this mess our country is in without one, but drawing the line between health and dollars is always going to be difficult

  3. I am intrigued by the idea of budgets in healthcare, as others have mentioned them from time to time. I would like to learn more if there is anyone that can explain how they are developed. Who develops them? Which data is used? What happens if the budget is exceeded? How do budgets work in a country with our level of chronic illness incidence?
    I know how to put a budget together for a company, but I don’t know how to put one together for healthcare.