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Massachusetts, National Health Expenditures, and Road Salt  (no comments)

Posted: Wednesday, January 27th, 2010

Federal health care legislation came to a screeching halt last week with the Massachusetts Special Election that has sent Scott Brown to the U. S. Senate. Brown opposes the federal legislation in its current form and represents the 41st vote needed to block further consideration of such legislation by the Senate. It is important to understand that Brown supported the bipartisan Massachusetts health care reform forged by then-Governor Mitt Romney (R) and the late Senator Edward Kennedy (D).

Along with Brown’s election, two other seemingly unrelated stories have recently been in the news—the Centers for Medicare and Medicaid Services (CMS) released its Annual Report on National Health Expenditures (NHE) and the media reported that many local governments have already exhausted their snow removal budgets due to the harsh winter weather. There is a connection between these three stories—Brown opposes the legislation in part because it fails to lower the cost of health care which is one of the keys to expanding coverage that is affordable. As health care draws a larger share of the nation’s and families’ resources, the availability of funding for other priorities shrinks.

First, the good news. Expressed as an annual rate of growth, 2008 was the best year in a decade. The increase in NHE between 2007 and 2008 slowed to 4.4 percent, the lowest annual increase in more than 10 years and well below historical levels. Between 1997 and 2007, the annual rate of increase ranged from 5.4 percent (1997) to 9.1 percent (2002). More good news—the trend. The NHE rate of growth has been slower each year in the last five years than in the previous five years. Between 1997 and 2002, the rate of growth increased each year until it peaked in 2002. Since the peak in 2002, the NHE rate of growth slowed each year from the previous year. The trend of slower growth rates helps to lower future spending.

Now, the bad news. Health expenditures continue to grow faster than the rest of the economy. Expressed as a percentage of the gross domestic product, 2008 was the worst year in more than a decade, in fact, more than ever reported. Spending on health care reached an all-time record high, accounting for 16.2 percent of our entire economy. In 1998, NHE accounted for 13.5 percent of our economy.

Between 1998 and 2008, the Gross Domestic Product (GDP) grew from $8.794 trillion to $14.441 trillion, an increase of 64.2 percent. Over this same period, NHE grew from $1.190 trillion to $2.339 trillion, an increase of $1.149 trillion or 96.5 percent. If NHE had remained at 13.5 percent of GDP only for 2008 i.e. not any of the years in between, NHE would have been $1.950 trillion, still an increase of $759.5 billion over 1998. But the actual increase was $1.149 trillion, resulting in an “excess cost” of $389 billion. The excess spending of $389 billion translates into $1,280 per man, woman, and child in the United States.

President Obama promised that health care reform would save the typical family $2,500. So his promised savings in fact are quite modest, and by historical comparison, should be achievable.
Value of 2.7 Percent of GDP. To compare what $389 billion could mean if spent elsewhere in the public sector, consider that federal, state, and local governmental transportation expenditures totaled $221.6 billion in 2008. So even a fraction of the $389 billion would have provided plenty of road salt to keep our roads safe in winter.

In the private sector, we could have purchased all agricultural products sold in 2007 ($297.2 billion) and all consumer electronic sales for in-home (televisions, telephones, computers, audio equipment) use ($82.8 billion). And we still would have had enough money left over to pay for the federal share of the cost of the Medicaid Disproportionate Share Hospital (DSH) program.

The News Gets Worse. Rick Foster, Chief Actuary of the Centers for Medicare and Medicaid Services (CMS), warns that if nothing happens to change our course, NHE will grow to 20.8 percent of GDP in 2019 under current law. Foster estimates that the Senate health care bill, the “Patient Protection and Affordable Care Act of 2009” (PPACA) will not lower costs as promised by President Obama, but will increase NHE to 20.9 percent of GDP. In today’s economy, 20.9 percent of GDP is $3.018 trillion. To put this figure into perspective, total federal and state spending on elementary, secondary, and higher education in 2008 was $476.7 billion. In other words, 20.9 percent of our current GDP represents more than six times our current spending on education.

All state expenditures (excluding federal funds and bonds) in 2008 totaled $1.072 trillion. So 20.9 percent of GDP represents 2.8 times current state expenditures. The unchecked increase in NHE as a percentage of GDP means that health care spending will continue to rise at the cost of everything else.

Who Pays? The shifts in the sources of NHE are also important to understand. As the table below shows, government spending has increased faster (109.7 percent increase) than private spending (86.1 percent increase). The biggest shifts occurred in the decline of out-of-pocket spending as a source of funding and the increase in the share of NHE paid by Medicare.

According to CMS, NHE will increase to $4.694 trillion in 2019 under the PPACA. Moreover, the distribution of funding between private sources and government sources will be flipped from their 1998 levels. As the table above shows, the private sector accounted for 55.6 percent of NHE in 1998 and government sources accounted for 44.4 percent of NHE. These percentages will be nearly reversed in 2019 according to CMS. Government spending will account for 55.3 percent of NHE and private spending will account for 44.7 percent in 2019.

Growth in NHE is Not Sustainable. The disproportionate growth of health care expenditures poses a significant threat to family and government budgets. Without lowering the cost of health care first, greater risk and therefore cost is transferred to the taxpayers. Left unchecked, NHE will continue to displace resources needed for non-health priorities, including essential public services such as education and keeping our roads safe. Individuals, employers, and government officials need to recognize that the current health care debate involves consequences well beyond health care. Health care cannot use $1 for every $5 spent without unprecedented shifts in our economic, political, and social structures. That is at the heart of Mr. Brown’s election.