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Don't blame medical costs for the rise in America's debt. Washington agonizes over runaway health care spending, but that trend has been changing. Over the longer term, the federal government's bigger problem will stem from the number of people needing treatment.
In 2012, health care expenditures grew by about 4 per cent for the fourth straight year, according to health systems research firm Altarum. That's pretty much in line with the three-year average rate of nominal GDP growth, a common measure of economic expansion. The new trend marks a stark contrast to the past few decades. Between 2000 and 2006, health care costs expanded 7.6 per cent annually while nominal GDP growth averaged 5.3 per cent.
The Congressional Budget Office (CBO) has already been tweaking its estimates based on this recent trend. Its budget projections in January cut the cost of Medicare and Medicaid in 2020 by $200-billion (U.S.). That will help trim expected deficits, but even eliminating all excess cost growth from higher prices and an increase in medical procedures wouldn't come close to solving the nation's fiscal woes.
Breakingviews estimates that debt-to-GDP will rise from 73 per cent today to 138 per cent in 2038, using the CBO's January projections and current policy. The CBO's long-term outlook published last June says that excess cost growth will account for 40 per cent of the new government health care spending over the next 25 years. Eliminating that entirely only takes long-term debt-to-GDP down to 126 per cent.
The graver problem is demographics. That's responsible for 60 per cent of coming health care expenditure growth, according to the CBO. This alone will push Uncle Sam's medical bill to 7.9 per cent of GDP in 25 years' time from 5.4 per cent now. Factor that into the ballooning deficit and then assume interest rates start rising later this decade and the nation's annual borrowing costs could rise from 1.4 per cent of GDP to 5.3 per cent in 2038, according to a Breakingviews calculation.
That doesn't undermine the positive impact on the U.S. economy of health care cost growth slowing down. Americans will have more money either to buy other goods and services or to invest. But even this best-case scenario isn't enough to steer the country off the path to bigger deficits.