New Paper: Forecasting the Cost of U.S. Health Care in 2040

The National Bureau of Economic Research has released a working paper by Robert Fogel entitled "Forecasting the Cost of U.S. Health Care in 2040." (Fogel was the 1993 winner of the Nobel Prize in economics.) Here's the abstract:

One of the most important debates among health economists in rich nations is whether advances in biotechnology will spare their health care systems from a financial crisis. We must consider that prevalence rates of chronic diseases declined during the twentieth century and that this rate of decline has accelerated. However, health care costs may continue to increase even as the age of onset of chronic diseases is delayed, because the proportion of a cohort living to late ages will increase. The accelerating decline in the prevalence of chronic diseases during the course of the twentieth century supports the proposition that increases in life expectancy during the twenty-first century will be fairly large, but the effect on health care in the U.S. will be modest. The income elasticity for health services is calculated at 1.6, meaning that income expenditures on health care in the U.S. are likely to rise from a current level of about 15 percent to about 29 percent of GDP in 2040.

The rate of health care cost growth is tangential to Social Security but extremely important to Medicare and Medicaid spending, the overall budget, and private sector health care costs.

Fogel's paper is also relevant to my recent paper on the relative contributions of health care cost growth and aging to overall entitlement spending increases. (Also see this blog post for more details.) In the paper, I noted that increases in health care costs ("excess cost growth") are more uncertain than costs associated with aging and cited an academic paper by several actuaries at CMS that concluded that excess cost growth will be significantly lower than CBO and the Medicare Trustees project. (This would make aging the dominant cost-driver over the long term.) Fogel's article also points to lower rates of health care cost growth. For instance, he projects that total spending on health care will rise to 29 percent of GDP in 2040, versus 38 percent in CBO projections.

None of this is to imply that controlling health spending isn't very important; it is. But I do think that folks who say we have a health care cost problem and nothing else are missing the important contributions of population aging to long-term entitlement costs.