CBO clarifies presentation of aging and health care inflation issues

As you may know from my endless rantings, I've argued against the claim that rising per capita health care costs are – in OMB direction Peter Orszag's words – the "real deficit threat." Rather, simple population aging will for the next several decades be the largest driver of rising entitlement costs. If so, this undercuts the administration's case that the only way to save Medicare and Medicaid is to exert increased control over private sector health care for working age Americans in order to, at least in the administration's hopes, reduce health cost growth.

In any event, the CBO's new Long Term Budget Outlook, which is worth reading for any number of other reasons – especially the excellent chapter on Social Security – includes a new and (in my view) greatly improved presentation of aging and excess cost growth issues. In Box 1-2, the CBO says:

Aging is the more important factor over the next 25 years or so. If the interaction is allocated between the two factors, aging accounts for about 64 percent of the projected growth in spending on the major entitlements by 2035. That result is not surprising because the aging of the baby-boom generation significantly expands the number of Medicare, Medicaid, and Social Security beneficiaries. Over the longer term, however, the situation reverses: 56 percent of the growth in total federal spending for those three programs by 2080 is attributable to health care costs per person rising more rapidly than per capita GDP.

My view is that while health care inflation is indeed the largest cost driver in the long run – here meaning, from around mid-century onwards – you first have to get through the short and medium terms. And in the next four decades aging-generated entitlement spending increases will generate so much additional debt that a budget crisis is very likely to occur. In that case, the predominant role later played by excess cost growth gets to be a bit academic.

What this means for the current debate is that the administration's focus on reforming private sector health care in order to fix Medicare and Medicaid is misplaced, even aside from the legitimate questions raised by others regarding the effects of these reforms. Even if the administration's health reforms were successful beyond their already-optimistic aspirations, if they don't confront the true drivers of entitlement costs it's unlikely they'll fix the problem.

Also check out this post from the Committee for a Responsible Federal Budget, which gives a good explanation of aging versus excess cost growth issues.