Will Health Reform Result in Financial Armageddon?

That, basically, is the question taken up by health economists Michael Chernew and Katherine Baicker and Dr. John Hsu in their latest New England Journal ...
by | March 23, 2010

That, basically, is the question taken up by health economists Michael Chernew and Katherine Baicker and Dr. John Hsu in their latest New England Journal of Medicine article, "The Specter of Financial Armageddon -- Health Care and the Federal Debt in the United States."

So how do our prospects look?

First, the bad news. In 2009, the U.S. debt to GDP ratio was 53 percent. Not great but not horrible either, as the chart below shows. The European Union sets a maximum target-to-debt goal of about 60 percent; however, some researchers believe advanced economies can approach 90 percent debt levels without adverse consequences.

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So does the U.S. have room to rack up more debt? Not really. Without major policy changes, say the authors, "our large and increasing structural deficits will push us past the 90 percent mark" by 2020. That, in turn, might subject the entire country to California- or Greece-style fiscal stress. 

So what will it take to close the gap? That's where things get grim. Given the historic growth in health expenses, to close the gap with taxes alone, the highest federal tax bracket would have to rise to 92 percent by 2050. Or policymakers could cut costs, by increasing cost-sharing, reducing benefit levels and limiting eligibility. However, the reductions will have to be serious ones. For, as the authors note, "Even if we halve the gap between the growth in health care spending and the growth in GDP" -- which reduction would be an impressive achievement -- some estimates suggest that our debt-to-GDP ratio would drop only from 300 % to 200 % by 2050."

So does that mean health care reform was a bad idea? Not necessarily. The authors note that health reform is full of mechanisms that could potentially reduce costs. However, their calculations make it clear that "potential" savings aren't enough. Unless deep and real reductions in spending occur soon, painful reductions and tax hikes will be a virtual necessity in the future.

John Buntin
John Buntin  |  staff writer
jbuntin@governing.com  | 

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