Changes in CBO projections of federal health spending: aging v. inflation

Brad Flansbaum was reading Aaron’s Carroll’s post and asking me via email about changes over time in CBO’s attribution of aging v. cost inflation as the driver of federal health care spending. It is an interesting question, but the answer doesn’t really change the fact that health care costs are the main spending side driver of federal budget unsustainability. Further, I don’t believe the relative impact of these two drivers of future health care costs necessarily implies a set of policy answers over others. Below I briefly compare the 2010 and 2012 CBO long run budget outlooks (you could do much, much more).

CBO’s long term budget outlook from June 2012 contains the following breakdown of the role of population aging v. cost inflation in explaining the growth in non-interest federal spending through 2037 (p. 15):

Focusing on health care programs (Social Security faces a purely demographic problem, while Medicare and Medicaid via the dual eligibles join the same problem with cost inflation), CBO says that population aging is responsible for between 52%-60% of the growth in federal health care spending through 2037, depending upon which budget scenario you use (extended baseline is the most optimistic scenario with federal debt-to-GDP stabilizing; the extended alternative scenario is the one where federal debt-to-GDP looks like Alpe d’huez).

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The elusive Goldilocks principle

CBO reports on options to address the fiscal cliff that looms on January 1, 2013 as numerous tax rates are set to increase. Not too cool, not too hot, just riiiiiiiiight is an elusive standard to address the number one policy priority of 2012 (not harm the economy, move toward a credible long range plan to stabilize the deficit/debt). Many have said do nothing and the deficit problem is fixed, but that ignores the timing of the fix and how it will impact the economy.

So, what we need is a reasoned deal that does not harm the economic recovery, but that takes credible steps to raise taxes over time, and reduce spending as compared to default levels over the next several decades (particularly health care costs). From the prologue of my book:

As we head into the 2012 election, the task remains the same: we need to undertake policies to improve our economy in the short run, while seeking a long-run plan to move slowly toward a balanced budget in the future. To achieve the latter will require some profound reform of our health care system and an increase in the proportion of the economy collected in taxes. There are other issues to be gotten straight, but without addressing those two realities (taxes are too low given any plausible level of federal spending and projected health care costs too high absent reform) we will never again have anything near a balanced budget.

We will get to it next week….