Bending the Health Care Cost Curve

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Bending the Health Care Cost Curve

If you have any doubt that Medicare and the other entitlement programs are in serious trouble, a simple chart will change your perspective. The Heritage Foundation recently graphed the average historic rates of tax revenues against the future growth in health care costs, based on the assumption that they will continue to rise at recent historical rates.1

Figures from the Congressional Budget Office show that in 1970, the combined cost of Social Security, Medicaid, and Medicare was 3.9 percent of GDP. By 2010, that figure had grown to a little over 10 percent. Projecting these rates of increase out into the next several decades reveals that Social Security will continue to increase slightly, but Medicaid, and Medicare costs will skyrocket. By 2049, these three costs will be 18.1 percent of GDP.

Now, here’s what’s so alarming about this projection: For decades, tax revenues have fluctuated right around 18 percent of GDP.

In other words, the payouts for the three programs will equal total tax revenue, leaving nothing for other government spending.

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Given this scenario, sometime before 2049, the country will be faced with five painful alternatives:

  • Dramatically raise tax rates. Using this approach would, of course, be counterproductive since it would put a further squeeze on economic growth and thereby lower tax revenues.
  • Run enormous deficits. But this would only serve to kick the day of reckoning down the road.
  • Cut entitlements. This would mean fully implementing the kinds of rationing mechanisms outlined in Obamacare.
  • Spend almost nothing on defense and discretionary budget terms. This is not a real option for obvious reasons.
  • Some combination of the previous four strategies.

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Considering the recent direction and pace of these costs, plus the lack of any acceptable response to the direction they are headed, it’s easy to conclude we are staring into an abyss. But this is assuming there will be no other factors at play. The Trends editors believe there will be. The solution to this growing cost issue will be enabled by a combination of deregulation, tort reform, new technologies, and consumer empowerment, forced upon us by stark economic realities.

Right now, a key element that could improve care and lower cost is innovation, both in new technology and new business models. But for this element to truly blossom, two things will need to happen: deregulation and tort reform.

Legal barriers currently stand in the way of innovators moving forward with new product ideas and ways of delivering care...

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