There are many forks in the road facing us in the U.S. for deficit reduction, as the picture shows. This is the cover graphic for Choices for Deficit Reduction, a report from the Congressional Budget Office (CBO) published November 2012.

Those roads could be labeled “Medicare” and “Medicaid,” as health is the #1 deficit driver for the American economy — most notably, Medicare and long-term care services financed via Medicaid. The CBO expects that per capita spending on health care, already at 18% of the national economy in 2012, will continue to grow faster than spending on other goods and services. (Historically, health spending per capita has increased about 1.5 percentage points faster than GDP per capita). At current growth rates, health care will run 21% of GDP in 2021.

Thus, the deficit focus is on health spending, which can be parsed into two bits: how health care is financed, and how health care is delivered and organized.

The ongoing cost driver is demographics, with baby boomers already starting to retire into the Medicare system. The cohort of people 65 or older will increase by one-third in the next 10 years, CBO projects, and health costs per person will rise. At the same time, the Affordable Care Act is growing the Medicaid population of newly insured health insurance enrollees.

The raw numbers in CBO’s August 2012 baseline are:

  • Medicare, $750 billion = 3.3% of GDP
  • Medicaid, $514 billion = 2.3% of GDP
  • Other major health care programs. $117 billion = 0.5% of GDP

For comparison, defense spending is $696 bn = 3.1% of GDP, falling into discretionary spending (as opposed to “mandatory spending,” the category into which the above health costs fall.

To reduce mandatory spending on health, the CBO identified provisions of the ACA that expand health insurance coverage, which would decrease spending by nearly 15% in 2020 and reduce the deficit by about $150 bn. This would also increase the uninsured by 29 million people in 2020. Converting the Federal share of Medicaid payments for long-term care services into a block grant would conserve $50 bn.

Since Social Security, Medicare and Medicaid are among the largest programs in mandatory spending, deficit reduction discussions focus on these areas. Other programs are much smaller and wouldn’t yield much savings compared with the health care budget behemoths.

On the discretionary front, spending covers national defense, transportation, education, international affairs, and law enforcement. (FYI, Veterans health care falls into discretionary spending).

Health Populi’s Hot Points:  “Because the aging of the population and continuing growth of health care costs have consequences well beyond the next 10 years, the fiscal challenges facing the nation are long term in nature,” the CBO concludes. But the choices we make must be done in the short term if we are to address the deficit and the economic security of the nation. The Affordable Care Act in its current state doesn’t do enough to move American health care toward value-based, patient-centered care. It suffers from “pilot-itis” in that the CMS Center for Innovation seeks proposals to “test” innovative payment and delivery models. However, such a plan will take years to bear fruit. This leaves action to the private sector, where employers and the likes of UnitedHealthcare, Aetna, Humana and a handful of Blues plans are on the ground moving enrollees toward consumer-directed plans and value-based benefits. The real action in health reform for the next couple of years will be in the commercial health market, not in Washington DC. More creativity will also be seen by state Governors who must balance budgets while delivering services — where health care is the #1 or #2 budget line item for all Governors in the U.S.