A Unified Long-Run Macroeconomic Projection of Health Care Spending, the Federal Budget, and Benefit Programs in the U.S

In the official reduced form models used by the CBO, Treasury, and the Social Security and Medicare Trustees for projections and policy analysis, many key variables, like real interest rates, health care cost and economic growth, are assumed, often based on a continuation of past trends. By contrast, in our model, these variables are outcomes produced by supply and demand, based on logical functional forms and deep parameter estimates from the literature or empirical analysis. This latter approach provides a more credible and realistic basis for projections with changing underlying conditions and less subject to optimistic hopefulness. We find that, within the next five to ten years, the deficit relative to national income will grow significantly beyond historical experience, and with the prospect of continued increases, without policy changes, may be regarded as unsustainable. In particular, we project that debt-to-GDP will be 132 percent in 2032, compared to CBO's recent projection of 115 percent. In 2052, we project 258 percent compared to CBO's 189 percent. Our projection of national health care spending relative to GDP in 2072 is 29.9 percent, compared to 28.4 percent by CMS, used by the Medicare Trustees. Longer term, our projections show even worse outcomes for debt, deficits, Social Security, Medicare, and health care spending than official projections, and declines in the rate of welfare improvement. These results mainly owe to higher rates of health care inflation, arising from labor shortage effects because health care is produced in a low productivity, labor-dependent sector, and real interest rates rise in the long-run because of increasing debt, bringing about the vicious cycle of growing deficits and debt. Acknowledgements: We appreciate helpful comments from and discussion with James Capretta, Jagadeesh Gokhale, and Steve Robinson. All opinions expressed and mistakes made are our own and not theirs, nor our organizations'.
The thing that keeps me up at night actually is the crushing challenge of the diminishing healthcare workforce in our country. We keep opening medical schools, modestly expanding graduate medical [...]