Unhealthy Debt

Published August 8, 2011

The Weekly Standard

From beginning to end, the debt crisis talks have come down to a struggle between advocates of tax increases and champions of domestic discretionary spending cuts. This important dispute has been at the heart of our politics for decades, and without question our out-of-control discretionary budget has a lot to do with the size of today’s deficit and debt. But it has little to do with tomorrow’s deficits and debt​—​that is, with the unprecedented oncoming explosion of federal spending and borrowing that terrifies our creditors and gravely threatens our future prosperity. Democrats were able to keep that approaching disaster entirely off the table in the debt ceiling fight. In the next round, Republicans must make sure to put it front and center.

Simply put, our coming debt crisis is a health care cost crisis. In 1971, the government spent 1 percent of GDP on Medicare and Medicaid. Four decades later, spending on these two programs has more than quintupled to 5.6 percent of GDP last year. In its latest long-term outlook document, published in June, the Congressional Budget Office projected that spending on these programs, and on the new entitlements created by Obama-care, will reach 10.4 percent of GDP by 2035 and 13 percent by 2050. In the meantime, all other government spending combined (including Social Security, defense, domestic discretionary spending, and everything other than interest on the debt) will actually decline, from 17 percent of GDP today to 14.6 percent in 2035 and 14 percent in 2050.

CBO projects that annual budget deficits will soar over this period to more than 15 percent of GDP each year by 2035 and 25 percent by 2050, and the national debt will be more than twice the size of the economy and growing. So even if the agency’s (likely too rosy) projections of economic growth come true and non-health spending falls as a share of the economy, health-entitlement spending would still grow fast enough to push the country off a fiscal cliff. Fixing our health care entitlements is the essential deficit and debt reform.

The president and congressional Democrats insisted on keeping meaningful health reforms off the table in the debt ceiling talks​—​criticizing Republicans for rejecting tax increases while they themselves rejected the only possible path to real debt reduction. Instead, they sought to lock in place their health care legislation (which vastly expands Medicaid spending and creates a costly new health entitlement through its state-exchange subsidies) and only tinker around the edges of Medicare and Medicaid.

In a study released on July 28, as the debt ceiling deadline approached, the actuaries of the Obama administration’s own Centers for Medicare and Medicaid Services found that Obamacare will increase, not reduce, national health expenditures​—​bending the cost curve not down but up, and exacerbating an already critical problem. But even when a “grand bargain” on the debt ceiling still seemed like an option, the president refused to consider any changes to Obamacare as part of the deal, and was open to only the paltriest changes to our older health care entitlements.

He proposed to double down on the price controls that have done so much to cause the health-cost crisis. He proposed to raise the Medicare eligibility age to 67, which the CBO says would save very little, since Medicare’s soaring costs are heavily weighted toward older seniors. He endorsed modest cost-sharing increases for certain Medicare services and shifting more Medicaid costs onto the states.

Such cuts might produce marginal savings for a time, but they would not come close to addressing the heart of the problem. They would lock in place the immensely inefficient open-ended payment structure of Medicare (which is the chief driver of health care cost inflation) and the new health care law’s architecture, with the federal government calling the shots in the health sector. Under such circumstances, cost cutting can only be achieved at the expense of quality care​—and even so it rarely happens. Worse yet, such trivial steps would make real reforms less likely, by letting our leaders persuade themselves they have dealt with entitlements when in fact they would have only bought a little time.

To fix health care and the federal budget, reformers must set their sights on a much more fundamental shift, away from central planning and toward a genuine marketplace in health care​—​with cost-conscious consumers subjecting insurers and providers to competitive pressures. They must repeal Obamacare and convert today’s open-ended health care entitlements into defined-contribution programs, with predictable government budgets and sound incentives for efficiency and quality. Public support would be focused on those who need it most, and everyone would have strong incentives to sign up for high-value, low-cost plans to cut their premiums.

In April, the House passed a budget that moves Medicare and Medicaid decisively in this direction. Such a step, and a similar approach for the individual market and small employers, is essential for our health care system, and for the nation’s fiscal future. If there ever is to be a grand bargain with the Democrats, Republicans must make reforms like these their absolute bottom-line demands​—because our badly broken health entitlement system is at the heart of the government debt problem.

During the recent negotiations, Democrats closed off the path to real health reforms. Their top priority was tax increases. But as the president himself put it in early July, “if you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up.”

For Republicans, spending cuts have been the top priority, and rightly so. But the real problem is spending on health-entitlement programs. If that category of spending is not brought under the discipline of an effective marketplace, then American health care, and our economy as a whole, will be on the road to ruin.

Genuine health care reform therefore needs to be at the core of the Republican case for fiscal sanity​—a case that in turn must be front and center in the 2012 election. That election may well be the only real chance we have left to avoid a genuine debt crisis and set America back on the path to enduring prosperity and strength.

James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director at the Office of Management and Budget from 2001 to 2004. Yuval Levin is Hertog Fellow at the Ethics and Public Policy Center and editor of National Affairs.

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