Despite a robust economy, the U.S. budget deficit is poised to double over the next year—to an eye-watering $2 trillion. As bad as that sounds, things would be a lot worse if it weren’t for a surprising bright spot: healthcare costs, which have been growing more slowly than expected for more than a decade.
It’s an odd situation that turns decades of Washington conventional wisdom on its head. People used to say that the key to deficit reduction was entitlement reform. Now entitlement reform seems possible—but only if people don’t try to bring the deficit into it.
Rising healthcare costs were a constant source of budgetary pain for the public and private sector alike for decades. Between 2010 and 2020, however, the Congressional Budget Office estimates that Medicare spending was nearly $1 trillion less than originally projected. Economists and health experts have theories, but no one is quite sure why.
After a brief spike upward because of Covid-19, the downward trend intensified. In February 2020, just before the pandemic, 21.7% of all U.S. household spending was on healthcare. That same figure was 19.6% by June 2022, its lowest level since 2008. It has rebounded a bit since, but still remains at levels comparable to 14 years ago.
Closing the federal deficit would require a combination of drastic spending cuts and huge tax hikes that neither Democrats nor Republicans are in the mood to contemplate. But closing the long-term gap in Medicare funding—long the nation’s toughest budgetary challenge—could be done with bipartisan measures that are about as close to painless as they will ever get.
Economists expect that cost growth will soon return to its decades-old pattern, but the recent reprieve offers an opportunity to end a long-running budgetary nightmare.
Both sides would have to be willing to give something. Republicans should agree to eliminate what could legitimately be called waste, fraud and abuse in the Medicare Advantage program, which allows seniors to choose a private insurance rather traditional Medicare. It has long been trumpeted by conservatives as a way to use market forces to contain long-term costs.
The program has been popular with seniors and is in many ways a success. But the Committee for a Responsible Federal Budget estimates that overpayments to insurers participating in the program will cost taxpayers up to $372 billion over the next decade.
Without getting too much into the details, the reasons have to do with how insurers measure something called the average “disease burden.” While not illegal, this practice is widely acknowledged as an abuse of the system, and Republicans should be enthusiastic to see it go—even if it means reducing expenditures on their favored program.
Democrats, meanwhile, should be willing to rein in a kind of diagnostic abuse that occurs in traditional Medicare. The program’s reimbursement rates to doctors and hospitals are governed by regulations that demand any changes be budget-neutral: Reimbursement rate increases for one procedure must be balanced by reductions for another, or by some other cost-saving measure.
The catch is that these regulations don’t apply to new procedures and services, and—unlike with prescription drugs—there is no rigorous system to determine their efficacy. Thus providers have a strong financial incentive to adopt new procedures or technology, rather than making more efficient and effective use of those already in place.
By 2033, according to one estimate, the addition of new procedures and services could increase Medicare spending by close $500 billion each year. Chris Pope of the Manhattan Institute, a conservative think tank, suggests that Medicare be required to accommodate new procedures and services in a budget-neutral way for up to six months. Medicare could then apply for additional appropriations to cover the ones it deems most cost-effective.
When combined with the savings from overbilling, a modest 10% decrease in spending on new services could save $600 billion over the next 10 years. That’s enough to cover the Medicare trust fund’s deficit for the entire period.
When compared to a single-year deficit of $2 trillion, that might not seem like much. But it would knock out a budgetary hurdle that has been tripping up Congress for decades.
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.