The rate of growth of health spending is the single greatest threat to balancing the U.S. budget in the long term. That’s the key message in The Budget and Economic Outlook: Fiscal Years 2009 to 2019, the latest forecast from the Congressional Budget Office released on January 7, 2008.

The report states that the three largest mandatory spending programs in America — Social Security, Medicare, and Medicaid — will grow by at least 8% in 2009. At the same time, the U.S. economy is expected to decline by 2.2% (this does not take into account any potential stimulus spending to be implemented by the Obama administration).

Growth in health and Social Security spending will come in part from rising unemployment, which will drive Medicaid spending by increasing the number of enrollees.

In the short-term, the U.S. is and will continue to have inevitable high deficits as the downturn in the economy and the financial crisis work out. But once past the downturn, the CBO warns that health care costs (growing at current rates) and the aging of the population will continue to grow large deficits and drive up federal debt. This will constrain long-term growth while reducing investment and savings. Ultimately, in this scenario, productivity and wages would slow. The chart above (from the CBO report, Growth of Health Care Costs, from January 2008) illustrates the impacts of aging on the growth of health costs) — numbers that were developed about the time that the recession began in in December 2007.

Currently, Medicare and Medicaid equate to 5% of the GDP. Spending for the 2 programs will increase much faster than GDP over the next decade. By 2019, the CBO projects, spending on Medicare and Medicaid will reach 6.3% of the GDP; by 2050, 12%.

Health Populi’s Hot Points: Health care costs are in the bulls’-eye of every stakeholder on the American health scene, from Citizens to Employers, Health Plans and Governors to Policymakers. Constraining cost growth will hit the pockets of each of these players.

What Citizens already knew and the data jockeys figured out is that Americans’ out-of-pocket health costs have been steadily increasing over the past ten years. This is due to growing management of chronic conditions like heart disease and diabetes. So out-of-pocket costs grew from $427 in 1996 to $741 in 2005.

This week, the Centers for Medicare and Medicaid Services told us that the rate of health cost increases in the U.S. has been slowing down. Most of the slowdown is due to slower growth in prescription drug spending — primarily thanks to growth of generic drug substitution for branded Rx’s. But the costs of hospitals and physician services increased a whole lot.

It’s not as if health costs actually fell — health costs still increased 6.1% in 2007, reaching $2.2 billion which is $7,421 per capita. The 6.1% growth is 50% higher than the consumer price index rise of 4.1% in 2007.

With Peter Orszag fresh out of the CBO and incoming Head Budgeteer for the Office of Management and Budget (OMB), we will have someone at the helm of this challenge who gets the arithmetic. He’s taking on the long-term balance act of a lifetime.