An Entitlement Contradiction? Not Necessarily

An Entitlement Contradiction? Not Necessarily

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Two fiscal stories are dominating the headlines in Washington.

On one front, President Obama seeks to greatly expand the federal government's role in guaranteeing access to health insurance. 

On another, Obama has created a National Commission on Fiscal Responsibility and Reform to control the growth of entitlement spending, partly in response to organizations such as the Peterson-Pew Commission on Budget Reform and the Committee for a Responsible Federal Budget that have promoted worries that an "aging society" would drive up entitlement costs, particularly for health care. 

Is President Obama contradicting himself by simultaneously looking for ways to expand health care coverage to tens of millions of Americans and  control costs?  Not necessarily. As strange as this may sound, the projected fiscal threat from health care costs is largely due to the entitlement being too limited, not too extensive.

Back in 2001, I was asked to speak at an international conference about health policy challenges from an aging society.  So I reviewed reports by international organizations such as the Organization for Economic Cooperation and Development (OECD) and the European Commission and discovered something very interesting: they did not treat health care costs as one of the major challenges caused by aging.

The reason is simple: an aging society does not increase on-budget health care costs in other countries the way it does in the United States, because the elderly have the same coverage as everyone else.  In some countries, everyone is in the same non-governmental forms of insurance, such as the French or Japanese sickness funds.  In others, as in Canada and the United Kingdom, everyone has the same government coverage.  Either way, when a person turns 65, the difference in costs is just the difference between their costs at age 64 and 65.

But in the United States, when a person reaches age 65, they shift from private budgets to the government budget.  The cost increase on the government's budget is almost entirely a cost shift within the economy as a whole.  To put this another way: if all Americans were insured through Medicare, total federal spending would be much larger – but the impact of aging on the federal budget much smaller!  Most of the budgetary effect of an aging population is due to the health care entitlement being more limited than in other countries.

There is a second major reason why health care costs cause larger projected budget effects in the United States than in other countries: health care is immensely more expensive in the United States.  With U.S. expenses around 17 percent of gross domestic product (GDP), and the next most expensive system at around 11 percent (Switzerland), any proportional increase has to have bigger effects here than anywhere else. 

That is one reason why it is misleading to focus on government costs as if that is the health care cost problem.  When a special review panel issued new projections of future Medicare costs in 2000, for example, there was a lot of publicity about a forecast that Medicare spending would rise by a total of 6.2 percent  of GDP over seventy years.  But the same report projected that total health care spending would rise by almost four times as much, to 38 percent of GDP.  The private spending involved would quite likely be "unsustainable" – but budget hawks ignored that potential problem. 
Focusing on the federal budget and ignoring the rest of the country distorts views of how to control health care costs, by giving the false impression that government spending is the problem.  In fact, the costs per person of Medicare have risen a bit more slowly than the costs per person of private coverage over the past four decades.  Health care costs are much higher in the United States than in other countries mainly because the payer side of negotiations is too fragmented, leaving providers dominant in most situations.  Payers have to be coordinated to control costs, and that requires government support, even if the government is not the payer.  If the entitlement were the problem, the U.S., with less coverage, would have a relatively inexpensive system.  Instead, the U.S. has the weakest government support for cost control, and the highest costs.
I am not going to claim to be impressed by the cost controls in the House and Senate health care reform bills.  But, precisely because conservatives are more interested in limiting government spending than in reducing the burden of health care costs on society as a whole, in the future they are more likely to support cost controls if health care is financed more by the government.  For example, Republicans opposed President Carter's proposals to regulate all hospital costs, but many GOP legislators supported hospital rate regulation when President Reagan proposed it as a way to reduce only Medicare spending.  Serious cost controls -- reducing the burden of health care costs on the entire society -- would be more likely if the federal government had more "skin in the game" of health care costs.

The conventional wisdom that spreads fear about a "long-term budget crisis" due to an "aging society" and excess entitlements to health care is badly misguided.  What policy-makers should do, for the good of both the country and the budget, is get serious about controlling all health care costs, soon – and stop talking about "entitlement costs" in the future.

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Joseph White is Director of the Center for Policy Studies at Case Western Reserve University.