Medicaid and Medicare are off the table. What's left Then? SOTU 2013 Edition
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In a move sure to excite his base, President Obama recently declared that cuts to Medicaid are off the table, while simultaneously ruling out savings of over $100 billion to Medicare achieved through raising the eligibility age.

No doubt, in the State of the Union tonight, the president will say that he's still open to making "balanced" spending cuts.  The problem is that, as a matter of pure accounting, the president's position is deeply disingenuous. And a recent brief by the CBO illustrates precisely why.

growth_means-tested_programs.png

The above chart, from the first page of the CBO report, illustrates the growth in means tested programs since 1972, as a portion of the economy. While direct cash assistance and nutrition, housing and education programs have grown from 0.9 percent of GDP to 2.1 percent, means-tested healthcare programs (primarily the federal portion of Medicaid) have on their own have reached almost 2 percent of GDP. If you factor in state spending on Medicaid, that number is close to 2.5 percent.

But that's not all. Future growth is projected to increase at an increasing rate!

Thumbnail image for health_care_growth.png

This growth in health care spending will crowd out spending from the other two categories - spending on Nutrition and Education programs will actually fall, while cash assistance programs will grow at relatively slower rates.

The Obama administration operates on the idea that we might have a spending problem - if you squint your eyes hard enough you might be able to see some inefficient spending, and some places where we could shave off a few billion.  But the President's basic stance is that the largest and fastest growing parts of federal spending are the holy-of-holies, miraculously efficient and effective. 

Still, if you don't have a spending problem (but you have to acknowledge that there is some problem) the only thing left is a revenue problem! The president's continued insistence that "the rich pay their fair share" certainly echoes this mentality.

Unfortunately for the president, reality rears its ugly head again.

Spending & Revenues % of GDP

 

Revenues

Spending

65-year average

18.0%

19.6%

Current (2011)

16.7%

24.9%

Difference

1.3% below trend

5.3% above trend

Source: Bureau of Economic Analysis / Federal Reserve Bank of St. Louis Data (FRED)

As the table above shows, current U.S. spending is a full 5.3 percentage points above the 65-year average; meanwhile, revenues are only 1.3 percentage points below. As the economy continues to recover, revenues will catch up to the long terms trend fairly quickly.  But it's far from clear that the economy can grow fast enough to drag spending down to trend.

Recall that total Medicaid spending represents about 2.5 percentage points of GDP, but by 2021 is projected to hit nearly 4 percent. If we are to abide by the president's preference and leave Medicaid alone, our options for deficit and debt reduction become excruciatingly constrained. And not dealing with the deficit - as the CBO recently noted can lead to a long-term 0.5 percent drop in GDP over an 11-year horizon.

So as you watch the president's State of the Union address tonight, watch for the president to tell you that we've got to protect Medicare and Medicaid, and have a balanced approach to deficit reduction. 

And remember that if you do the first, you can't do the second. 

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